Avoiding penalties when reporting damage awards and settlements: four steps CPAs can take.Many businesses and government agencies have paid out damage awards or settlements to third parties for various violations. Whenever an award or settlement must be paid, proper federal tax reporting is required to avoid potentially substantial tax penalties. CPAs should be familiar with the four steps of such reporting, to properly advise clients. HOW MUCH IS TAXABLE? Depending on the type of award, all or part of the amount paid may be taxable. So the first step is to determine the part of the award or settlement that is taxable. Likewise, attorneys' fees paid to an injured in·jure tr.v. in·jured, in·jur·ing, in·jures 1. To cause physical harm to; hurt. 2. To cause damage to; impair. 3. party's attorney also may be reportable as taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. to the injured party Noun 1. injured party - someone injured or killed in an accident casualty victim - an unfortunate person who suffers from some adverse circumstance That was the case in Banks, II, 125 SCt 826 (2005), when the Supreme Court held that the contingent attorneys' fees were taxable to the injured party FORMS Next, the proper form must be used to report the taxable amount paid. Generally, if the per son receiving the funds is a past or present employee, and the payment is for past, present or future wages or other employment compensation, form W-2 must be filed and given to the employee for the taxable amount of such compensation. On the other hand, nonemployees receive form 1099-MISC (miscellaneous income). Payments for nonwage or noncompensation amounts would always be reported on form 1099-MISC, even for employees. If interest is paid on an award, it should be reported on a separate form 1099-MISC. Similarly, the payment of attorneys' fees related to taxable awards or settlements must be reported on form 1099-MISC to the injured party. Certain includible attorneys' fees and costs may be deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). ; see IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. section 62(a)(20). RECIPIENTS The third step is to determine whether the attorney or law firm receiving part of the award or settlement should be issued form 1099MISC MISC Miscellaneous MISC Miscellany MISC Miscarriage MISC Malaysia International Shipping Corporation MISC Maui Invasive Species Committee MISC Minimum Instruction Set Computing MiSC Microsoft Software Center (Indonesia) . Under proposed regulations section 1.6045-5(a), an attorney or law firm that receives any part of a settlement or award must receive form 1099-MISC from the payer. The amount reported on that form is the gross amount paid to the attorney or law firm. If the attorney's or law firm's name is on the settlement check as well as on a separate fee check, both amounts should be reported on form 1099-MISC to the attorney or law firm. If the attorney's or law firm's name appears only on a separate check for its fee, that amount alone would appear on form 1099-MISC. WITHHOLDING The last step is to determine whether it's necessary to withhold taxes. Withholding for wage compensation is generally required, while backup withholding backup withholding Compulsory withholding from payments to an investor in order to take care of a potential tax liability. Payments of interest, dividends, and proceeds from a sale of securities are subject to backup withholding when certain requirements are for other amounts paid may or may not be required, depending on the circumstances. The failure to properly determine and report the taxable amounts of awards or settlements can result in severe penalties to the payer and liability for taxes not withheld. For more information, see Tax Clinic, "Avoiding Substantial Penalties by Properly Reporting Damage Awards and Settlements," by Stan Kaminski, JD, in the August 2006 issue of The Tax Adviser. Notice to Readers: Members of the MCPA MCPA, MCP 2-methyl-4-chlorophenoxyacetic acid; a weedkiller reported to be nontoxic at the levels likely to be encountered on pasture, though it has killed cattle dosed experimentally with large single doses. tax section may subscribe to Verb 1. subscribe to - receive or obtain regularly; "We take the Times every day" subscribe, take buy, purchase - obtain by purchase; acquire by means of a financial transaction; "The family purchased a new car"; "The conglomerate acquired a new company"; The Tax Adviser at a reduced price. Contact Judy Smith at 202-434-9270 for a subscription to the magazine or to become a member of the tax section. --Lesli S. Laffie, editor The Tax Adviser |
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion