New IRS Rules for Lawyer Fee Reporting
Profit Ability Article Highlight

In the course of building and running a company, you will most certainly be involved in litigation at some point in time. If you, as a plaintiff, are fortunate enough to be on the winning side, you will like ly receive some sort of settlement. For years , the reporting requirements of settlement income paid to the plaintiff and its representing attorney have been hotly contested. Even the individual circuit courts cannot agree on the issue. The main issue in question is really two-fold.

First, does a defendant who pays out a settlement have to file 1099 documentation to the IRS for monies paid? The second question at hand concerns whether or not the settlement amount paid by the defendant to the plaintiff has to be reported as income. Last year, the IRS clarified the issue by handing down new rules and guidelines that took effect on January 1st of this year.

According to Federal Regulation 48754, beginning this year, the defendant must report payments made to the plaintiff or to plaintiff's attorneys on Form 1099 (26 CFR § 1. 6 041-1(f)(2)). So let's say WrongCorp loses a suit to RightCorp and is forced to pay a sum of $1,500,000. This sum is to be divided by paying $1,000,000 to RightCorp and $500,000 to Right's attorney for a total of $1,500,000. If this is the case, the defendant, WrongCorp, must issue two separate 1099s. WrongCorp must first issue a 1099 to Right for the full $1,500,000 amount and a second 1099 to Right's attorney for the $500,000 sum.

On the plaintiff's side, the reporting of settlement income offers a pretty clear "double-counting" instance. The IRS now requires plaintiffs to report the full amount of any settlement as income without any regard for monies paid to its attorney. So taking the WrongCorp vs. RightCorp case above, the plaintiff, after winning and receiving its award, must report the full $ 1,500,000 amount as income and at the same time issue a 1099 to its attorney for the $500,000 paid for legal services.

If you have questions on this issue, please feel free to contact our firm's offices at 714.937.6337. If you prefer, we can be reached via e-mail at info@talleynco.com.