Tricks and Traps For Lawyers With IRS Form 1099
Robert W. Wood1
Robert W. Wood practices law with Wood LLP (www. WoodLLP.com) and is the author of Taxation of Damage Awards and Settlement Payments and other books available at www.TaxInstitute.com. This discussion is not intended as legal advice.
Lawyers and clients should care about IRS Forms 1099. They are used by payers and payees to report payments outside the employment relationship,2 and allow computer matching of Social Security numbers and dollar amounts paid and received, so that IRS collection efforts can be streamlined and automated. In most cases, Forms 1099 report payments that qualify as income of one type or another and affect the amount (and, in some cases, the type) of taxes you pay. There is an exception to that general rule, however, that is important to both lawyers and their clients: a Form 1099 can report gross proceeds to lawyers, which may reflect payments that do not constitute income to either the attorney or their client3âbut it is a category that a surprising number of lawyers may not understand.
If you receive a Form 1099 in the mail, open it and check the numbers. Errors in reporting do occur, of course, so if you believe a Form 1099 is wrong, you may be able to get the issuer to correct or undo it. But that is usually tough unless it is demonstrably an error. If you cannot get it corrected, you will likely be required to report the entire amount on your tax return, and will have to explain the error there.