Information reporting by attorneys for payments to experts.

Under Sec. 6041(a), a person engaged in a trade or business must file information returns with the IRS, reporting payments made to nonemployees for services rendered in the form of salaries, wages, commissions, fees, incentive awards and other compensation totaling $600 or more in a calendar year. In addition, under Sec. 6041(d), the payor is required to furnish information statements to the payee. Normally, the payment is reported to the payee on Form 1099-MISC; failure to follow the reporting requirements can subject the payor to penalties (Secs. 6721 and 6722).

People or entities who make similar payments on behalf of others (middlemen) can be treated as payors for purposes of the reporting requirements. For a middleman to be subject to the requirements, he must exercise an oversight function with respect to the payment (Rev. Rul. 93-70). Rev. Rul. 93-70 dealt with a bank acting as an escrow agent that disbursed funds to a subcontractor on construction projects. The Service found that the bank had sufficient supervisory dudes to conclude that it performed oversight and management functions on behalf of the owner and general contractor of the property. As such, it had a reporting requirement with respect to the payments made in connection with the project.

In the case of attorneys, most are aware of the information reporting requirements with respect to payments made to their direct employees or to outside consultants involved directly with their practices. Nevertheless, many attorneys (particularly personal injury attorneys) may not be aware that the reporting requirements also apply to payments made to experts. Recent Letter Ruling (TAM) 9744002 discussed the reporting requirements for personal injury attorneys who pay expert witnesses and private investigators in connection with contingency fee cases.

In the TAM, attorney A worked under a contingency-fee agreement with his clients. Under the terms of the agreement, the clients would pay A one-third of any gross recovery if the case was settled without a lawsuit being filed, or 40% if a lawsuit was filed; any costs incurred by A for expert witnesses and private investigators were to be deducted from the gross recovery. Under A's agreement with the client any settlement proceeds were deposited in A's client trust account, with A Income fee being paid first, the disbursement of any costs next and the client receiving the balance.

In prosecuting a client's case, A employed expert witnesses and private investigators. In most cases, A determined which experts to hire and negotiated their fees. A gave the experts specific instructions on how they were to perform their duties, and supervised the experts and investigators to make sure they were properly carrying out their obligations. In some cases, the experts would be paid as the case progressed, with A making the payment out of his own funds. In other cases, the experts agreed to defer payment until the case was settled, in which case they were paid out of the settlement proceeds.

The IRS ruled that, with respect to the payments to the private investigators and the expert witnesses, A was a payor under Sec. 6041 and was obligated to file information returns with the Service and notify the payees of the amounts paid. The key factor cited was the fact that A was performing management and oversight functions as to the work performed by the private investigators and expert witnesses. The employment, instruction, supervision and ultimate payment of the experts constituted management and oversight to bring A under the reporting requirements.

Comment: Attorneys who engage experts and investigators should familiarize themselves with the information reporting rules. Attorneys should request employer tax identification numbers or Social Security numbers from the experts on Form W-9 at the beginning of the engagement. In addition, payroll services may be able to assist attorneys with these reporting obligations.