Lawyers, it turns out, are singled out in several ways with IRS Forms 1099. They receive these tax forms for most payments, but they get a special type of 1099 that is not counted as income, and that is a good deal. But they also have to send many 1099s.
IRS Forms 1099 allow computer matching of Social Security numbers and dollar amounts paid. That makes it possible for IRS collection efforts to be streamlined and automated. Failing to report a Form 1099 on your tax return is likely to get you an IRS notice in the mail asking you to pay tax on the amount you failed to report. Thus, if you receive a Form 1099, report it, even if you are claiming the money should be tax free.
Everyone should pay attention to what kind of form they receive and in what box the payment is included. You can’t really know what to put on your tax return without knowing the details. But it’s the gross proceeds one for lawyers that is the most surprising. It reports a payment, but not necessarily a report of income the way the other Forms 1099 and boxes are.
It's to keep track of lawyer payments too. Section 6045 reporting of gross proceeds paid to an attorney is required even if the settlement is tax-free to the plaintiff , or is a capital recovery that is generally not reportable to a plaintiff . The plaintiff should not receive a Form 1099, but the lawyer will. And where a recovery isthe plaintiff and the plaintiff’s attorney.
That duplicate reporting means in a $1M settlement to be divided $600k to client, $400k to lawyer, the lawyer usually gets a Form 1099 for $1M, and so will the client for the full $1M . Gross proceeds paid to an attorney are not reported ason the Form 1099, but are instead reported in a special box, Box 10, which is specifically labeled as “gross proceeds paid to an attorney.” Unlike the other boxes on a Form 1099, the IRS does not assume that amounts reported in Box 10 are income.
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