One of our ongoing goals is to keep abreast of issues that may effect our attorney clients and friends. This Tax Alert Memo will discuss the reporting requirements for attorneys related to their receiving and issuing 1099s.

The Taxpayer Relief Act of 1997, signed into law on August 5, 1997, broadened the 1099 reporting requirements of businesses making payments to attorneys and it is effective for payments made after December 31, 1997. New IRS Code Section 6045(f).

• $600 or more per year as before.
• Regardless of whether the attorney is the exclusive payee.
• Regardless of whether the attorney is incorporated.
• Attorneys (law firms) must promptly provide their federal ID # to the payer or be subject to penalties or backup withholding.
• A second, concurrent payment to the attorney solely for the benefit of the attorney's client does not have to be included in the attorney's 1099 amount by the payer.

On July 3, 1997, Private Letter Ruling #9744002 was issued by the IRS and it advised the attorney he would have to file 1099s for certain amounts paid out of a client's trust account, as follows:

"A, the attorney, selects and hires expert witnesses and private investigators on behalf of clients. In choosing between two or more expert witnesses or private investigators (PIs), A may consult with a client as to the client's preference. If necessary, A provides instruction to the expert witnesses and PIs as to their duties and assures that they perform their services. A negotiated with the expert witnesses and private investigators about the amount of their fees and pays the expert witnesses and PIs for their services. As to the expert witnesses and PIs, A is exercising oversight and management functions. Thus, with respect to these payments, A is a middleman payer under §6041."

The "middleman rule" had already been somewhat clarified in 1993 (Rev. Rul. 93-70), in which the IRS concluded that a middleman may be treated as the payer if the middleman exercises oversight or management functions in connection with the payment. Regulations explaining the "middleman rules" (IRS Reg. 31.3406(a)-2) were proposed in 1990 and adopted in 1995.

Subsection (b)(3) of proposed IRS Reg. 1.6045-5 (issued on May 21, 1999) will specifically require 1099 reporting for payments by one attorney to another attorney. See example below. The proposed regulation will also increase the general reporting requirements of businesses making payments to attorneys by (a) eliminating the $600 minimum annual threshold and, (b) including all payments to attorneys whether or not for their legal services. These new rules will apply to payments made to attorneys after December 31, 1999.

"Y, a defendant in a suit, makes a payment of the gross proceeds of the amount awarded under the suit to the plaintiff's attorneys, H, I and J. H, I and J are not related parties. The payment is delivered to J's office. J deposits the monies into her trust account and pays H and I their respective shares. Y must file a 1099 for the payment to J. J must file 1099s for the payments to H and I."

Federal and State laws require any person, partnership, corporation, or other organization including a non-profit organization engaged in a trade or business to file Form 1099. This form reports payments made in the course of a trade or business. They are provided to the Internal Revenue Service (IRS) and the recipient of the payments.

Failure to report payments and/or report payments accurately may result in penalties of up to $50 per Form 1099 and 31% backup withholding.

What Payments Are Reported on Forms 1099?

• Payments of $1.00 or more for acquisition or abandonment of property secured for debt, broker or barter transactions, crew members by owners or operators of fishing board, distributions from medical savings accounts.
• Payments of $10 or more, relating to stock dividends or distributions, unemployment compensation, state tax funds, interest, royalties, original issue discount or distributions from cooperatives to their patrons, distributions from retirement or profit-sharing plans, IRA's, Simples, or insurance contracts.
• Payments of $600 or more, relating to liquidation distributions, rent, providers of health and medical services, non-employee services, crop insurance proceeds, cancellation of a debt owed to a financial institution, credit union or government, and gross proceeds from the dale or exchange of real estate.
• Payments made to corporations (other than payments for medical/health services) are not reportable.

OVERVIEW: Even though the Private Letter Ruling noted earlier cannot be used or cited as a precedent by either the IRS or the taxpayer, the additional clarification of the "middleman rule" needs to get everyone's attention. With the proposed regulations in circulation, it's obvious to conclude that the handwriting is on the wall: the IRS is going to make the 1099 reporting to and by attorneys more stringent than for others. The IRS already has its industry audit guide for law firms and, if there is an audit, the law firm's 1099 reporting habits are guaranteed to be closely scrutinized. All law firms, regardless of their size and irrespective of the type of legal practice, need to reexamine their 1099 reporting practices.

Keep in mind there are always exceptions to the rules noted above. However, if you are ever in doubt, go ahead and file the 1099 anyway.

FOLLOW UP ASSISTANCE: We will be more than happy to mail/fax you the complete IRS Regulations, Letter Ruling and further detailed 1099 reporting requirements upon request. If you have any further questions on reporting requirements to or by attorneys, please don't hesitate to contact us.

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