Calling All Tax Lawyers

[AustinTejasFan]

Portions of third party liability damage awards are treated as taxable income by the person receiving the settlement.

IRS tax law says that an insurance company making payments to settle such claims must file a form 1099-MISC to report the taxable portion.

Is the insurer permitted and/or obligated to retain the tax for IRS?

 

[NickDanger]

No tax expertise here.

Any time a carrier sends money to me, they 1009 me for the entire amount, even though my portion is anywhere from 0% on up. Sometimes my client's portion is taxable (lost income) and sometimes it isn't (reimbursement of a casualty loss). The insurance carrier NEVER withholds anything. I don't know if they should, but they never do so I doubt there is an obligation.

The rules for sending money to attorneys are not the same rules as you are referring to, but the parallel ought to be somewhat useful.

 

[AustinTejasFan]

Thanks Nick.

You've given me more info than the 6 yahoos I talked to at IRS, including 2 dudes in their tax law division.

I actually found a good bit of info on the IRS web site while I was on hold, including the bit about the 1099-MISC. Which by the way is pretty much used the same for lawyers and plaintiffs.

I just couldn't find out whether the insurance company could legally withhold the tax, or whether IRS imposes any obligation on them to.

I'm researching a situation where I've been told a major national insurer is doing this.

 

[tropheus]

look at the back up withholding rules on the irs website... that might help.

Actually, your question is better suited to a tax accountant than a tax attorney.

 

[NickDanger]

I wasn't aware there were similar rules for unrepresented claimants. At the time they instituted the 1099allattorneyreceipts rule I understood it to be a reflection of the IRS's mistrust of lawyers and their trust accounts.

I see huge problems with the idea of withholding on liability payments. A typical claim might include some pain and suffering, disfigurement, property damage, some lost wages, medical bills, lost earning potential. While I think the rules about which ones of those are taxable aren't terribly hard to figure out, what would is VERY difficult is to assign values to the categories unless there is an actual judgment (and we are unrepresented here from what I understand so there isn't likely to be a judgment). With that task in mind, it would surprise me if the IRS were to require an insurer to make such a determination and then withhold based upon that determination. I guess I shouldn't be surprised at the IRS, but I would be.

I don't handle cases after the money is distributed, but if I were the recipient of funds I would sure want to characterize the payment as much as possible as non-taxable. While most of my clients receive reimbursement for casualty losses I certainly claim Article 21.55 entitlement and I would be shocked if that weren't taxable. I cover my *** with my clients and tell them that I have no idea and I get them to acknowledge that I haven't advised them.

 

[NickDanger]

Oh yeah. I think they are required to withhold 31% if you haven't filled out a W-9.

 

[tropheus]

What Nick said is what I was thinking of -- just couldn't remember the form. Backup withholding is required in certain situations, but if the receipient doesn't meet one of those situations and signs under penalties of perjury to that effect, the payor can just pay the amount directly to the receipient with no backup withholding.

 

[NickDanger]

Nowadays they won't even send me a check unless they have my TIN on file. 100% withholding, so to speak.

 

[AustinTejasFan]

IRC section 104(a)(2) says fees paid to an attorney of $600 or more are reportable in box 7 of form 1099-MISC.

IRC section 1.6041-1(c) requires the payor (insurance company) to determine whether the payments to the plaintiff are taxable.

 

[AustinTejasFan]

From form W-9

What is backup withholding? Persons making certain
payments to you must under certain conditions withhold and
pay to the IRS 28% of such payments (after December 31,
2002). This is called “backup withholding.” Payments that
may be subject to backup withholding include interest,
dividends, broker and barter exchange transactions, rents,
royalties, nonemployee pay, and certain payments from
fishing boat operators. Real estate transactions are not
subject to backup withholding

 

[NickDanger]

Does that also mean that the insurance payor has to determine the extent of taxability and only 1099 that amount? (re: my comment about mixed settlements). I bet they just 1099 the whole check and let the taxpayer justify it to the IRS. That's what they do with attorneys and the IRS ought not to be displeased at the prospect of "over 1099ing" as opposed to the prospect of "under 1099ing."

My brief interview process found no one who didn't fall into the attorney category and thus: 100% 1099 and 0% withholding.