Client Alert Fall 98 - An Attorney's Nightmare

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Client Alert - Fall 1998

An Attorney's Nightmare

by: Rich Schwartz, CPA and Craig Potter, CPA Although not well publicized, the Taxpayer Relief Act of 1997 significantly changed the reporting requirements for payments to attorneys. The new law provides that any person engaged in a trade or business who makes payments in excess of $600 to an attorney or law firm (partnership and/or professional corporation) must file an information return (Form 1099-Misc) with the Internal Revenue Service and provide a copy to the recipient. The exemption from reporting payments to corporations no longer applies to payments for legal services. All payments are subject to this requirement, even if the payment is a gross amount paid into an attorney's escrow account for subsequent distribution to the attorney's client.

If the amount of the attorney fee cannot be determined, the total amount paid must be reported in Box 13 of Form 1099-Misc with Code A. If the attorney fee is known, the amount is reported in Box 7. These new requirements create a greater record keeping burden on the attorney and/or law firm because they will now have to reconcile the "Gross Proceeds" amounts on Form 1099-Misc-Box 13 with the revenues reported on their respective income tax returns.

Attorneys are now required to report award payments to their clients on Form 1099-Misc-Box 3 "Other Income" based on the type of payment being made. If you would like more information on the new reporting requirements, please give us a call.

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