Attorneys, sharpen your pencils! The IRS has imposed new 1099 reporting requirements for payments made to attorneys in 1998. Beginning in 1999, the I.R.C. Sec. 6045(f), added by Section 1021(a) of the Tax Relief Act of 1997, will require that any person engaged in a trade or business making a payment to an attorney in the course of that trade or business must file an information return with the IRS for 1998 and send a written statement to the attorney recipient. The attorney or firm will be required to provide a taxpayer I.D. number to the payer. Form 1099-B is expected to be used for reporting of the gross payment amount, unless the 1099-Misc income reporting form is allowed for reporting the known amount of the payment to the attorney or law firm "in connection with legal services."
This applies to all individual attorneys and firms, whether or not the attorney or firm is the exclusive payee, and affects those receiving settlement checks from non-clients. The extent to which retainer payments might be reportable (e.g., in criminal or family law or other substantial retainer-type matters) is not yet clear. However, because retainers are or could become earned income, the IRS might decide to interpret them as "any payment to an attorney in connection with legal services (whether or not such services are performed for the payer)." Sec. 1021 (a), amending I.R.C. Sec. 6045 (f)(2)(A)(adding the new provision).
What are attorneys to do, besides improving their bookkeeping procedures? The reporting requirement should not pose much difficulty for firms paid by regular business clients for legal services. However, attorneys receiving settlement checks will no longer be exempt from reporting as they have been previously. The House Report explaining the new provision and the reasons for the change, states that "[t]he provision requires gross proceeds reporting on all payments to attorneys made by a trade or business in the course of that trade or business. It is anticipated that gross proceeds reporting would be required on Form 1099 B . . . . The only exception to this new reporting requirement would be for any payments reported on either Form 1099 Misc under Section 6041 (reports of payment of income) or on form W2 under section 6051 (payments of wages)."
This appears to require attorneys to make a choice: (1) either provide the payer with both the distinct attorney fee and client share amounts; or (2) allow the payer to report the "gross proceeds reporting on all payments to attorneys," regardless of whether the attorney is the exclusive payee. For further guidance, attorneys are strongly encouraged to consult with their professional tax advisors.
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