Information reporting for payments to attorneys.

• Author: Koppel, Michael D.

The Taxpayer Relief Act of 1997 (TRA '97), Section 1021, added Sec. 6045(f), requiring that any person engaged in a trade or business and making payments to an attorney file an information return reporting the payment to the IRS. In May 2002, the IRS issued Prop. Regs. Sec. 1.6045-5. It appears many attorneys and law firm administrators are not aware of the requirements and their complexities, or are otherwise not complying.

Why a Reporting Requirement?

A string of unfavorable media stories in the late 1990s shed light on the problem of attorneys not reporting taxable income. The TRA '97 Committee Report states, "the provision have a positive impact on compliance with the tax laws...." Why pick on lawyers? The TRA '97 House Report provides, "Although some might consider it inappropriate to single out payments to one profession for additional information reporting, requiring reporting is appropriate in this instance because attorneys are generally the only professionals who receive ... payment[s], a portion of which may be income to them and a portion of which may belong to their client." This concept permeates the proposed regulations.

Scope

Although generally, payments made to corporations are not subject to information reporting (usually made via Form 1099-MISC, Miscellaneous Income), Prop. Regs. Sec. 1.6045-5(d)(1) defines "attorney" as a person engaged in the practice of law, whether as a sole proprietor, partnership, corporation or joint venture. The exception generally provided for payments to corporations does not apply; thus, payments to law corporations are subject to reporting.

Generally, payments covered by another reporting requirement are not subject to Sec. 6045(f). For example, under Prop. Regs. Sec. 1.6045-5(c), payments of wages by an attorney's employer are not subject to the rules; presumably, these payments are reportable under Sec. 6051 as wages on Form W-2. Further, a partnership's payments of compensation or profits to partners are not subject to these rules, nor are a corporation's payments of dividends to shareholders; these are reported under other provisions.

Under Prop. Regs. Sec. 1.6045-5(f), Example 4, a check payable to a plaintiff (not to an attorney) is not subject to the reporting requirements, even if the check is delivered to the attorney.

Example: P Corp., a defendant in a suit for damages, knows that C, the plaintiff, has been represented by attorney A throughout the proceeding. P settles the suit for...