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Birmingham Bar Association Bulletin | Spring 2015

Tax Law respect to A for $300,000. But P does not fi le an information return with respect to tax-free damages paid to C. In this example, if the check is made payable only to the client, no 1099-MISC is issued to the client. In cases involving nontaxable damages paid to the attorney, or if the attorney is a payee, the defendant is required to issue a 1099-MISC to the attorney. In situations where an attorney takes delivery of a check made payable to a client but the attorney is not a payee, there is no 1099- MISC fi ling requirement. Also, an attorney is not a payee when included on the check as “in care of ” or “client c/o attorney.” Payment (and the 1099-MISC requirement) is triggered when the attorney is listed as payee on the check—sole or joint—and has the ability to negotiate the payment. Payments include cash, wires or electronic transfers. WATCH OUT FOR A POSSIBLE PENALTY FLAG In general, Form 1099-MISC is due to the recipient by January 31 and to the IRS by February 28 (March 31st if fi led electronically). Penalties range from $30 to $100 per return depending on the tardiness of the fi ling. However, if the IRS determines that the failure-tofi le is due to intentional disregard, the minimum penalty is $250 per 1099-MISC with no maximum. While there are exceptions to the failure-to-fi le penalties, begging for forgiveness is not a position you want to fi nd yourself in. On the client side, a failure to correctly report proceeds from a lawsuit can bring substantial penalties. Th e IRS can impose an accuracyrelated penalty equal to 20% of the underpayment. Tax treatment of settlement or lawsuit proceeds (and correctly deducting associated expenses) is rarely simple and straightforward. STAY IN THE GAME Once a fi nancial settlement is reached, the tax treatment and reporting are often left to someone else, such as a defendant or insurance company accounting department. In my experience, once a 1099 is issued it is almost impossible to get the issuer to change positions and correct a document. An ideal outcome is when all parties agree on the tax reporting during the settlement process. To avoid surprises, this may mean having the claimant’s accountant involved in the process. A little more complexity and expense? Possibly, but well worth it in order to reduce exposure and maybe achieve a better outcome. G CPA Mike Baker is Managing Partner of Dent, Baker & Company. He joined the fi rm in 1989. A Certifi ed Financial Planner, Mike is a member of AICPA and the Alabama Society of Certifi ed Public Accountants. Reach him at Mbaker@dentbaker.com. Pharmaceutical consulting & exPert Witness services After twenty-five years in executive and management positions with pharmacy organizations and pharmaceutical manufacturers, and after six years of service as Secretary to the Alabama State Board of Pharmacy, Herb Bobo is pleased to now provide services to the legal community. Expertise includes all phases of operations, licensing and regulation. herb bobo consulting herbbobo@cox.net Licensed Pharmacist since 1973 Birmingham Bar Bulletin/ Spring 2015 13


Birmingham Bar Association Bulletin | Spring 2015
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