Most attorneys know that Forms 1099 are issued in January for the prior year with a copy sent to the IRS, but many attorneys are not familiar with their 1099 reporting requirements. Contingent fee attorneys are most at risk when it comes to penalties and tax issues related to failure to report and issue Form 1099s.
In some cases, an attorney must issue 1099’s to clients if the attorney has exercised significant oversight and management of client’s monies. In that case, they become payors and may need to issue a Form 1099 when funds are disbursed. Most of the time, however, it is not necessary for an attorney to issue a Form 1099 to their clients for settlement money; this responsibility usually falls on the shoulders of the defendant paying the settlement monies. For example, if an attorney receives a joint settlement check to resolve a client’s lawsuit, the attorney is not usually the payor of the money. The settling defendant must issue the Form 1099.
A payment to a corporation is usually exempt. However, payments to an incorporated law firm are an exception to this rule and do require a Form 1099 be issued. If an attorney pays fees to an incorporated co-counsel or a referral fee to an incorporated attorney, the attorney needs to issue a Form 1099. Attorneys must issue a Form 1099 when paying more than a total of $600 a year to co-counsels, investigators, or expert witnesses. If an attorney fails to issue a Form 1099 in one of these instances, the IRS may claim that the expense is non-deductible.
If an attorney intentionally did not issue a Form 1099, but was required to, then the attorney could be slapped with a penalty by the IRS equal to 10% of the amount that was supposed to be reported on the Form 1099.
A failure to issue a Form 1099 to a jury consultant or contract attorney who is on an independent contractor basis could also be considered as evidence that they are employees, triggering a plethora of more penalties related to payroll taxes and payroll tax filings.