INFORMATION DEPARTMENT VOLUME 15, NUMBER 3
REPORTING ERRORS How to fix IRS Form 1099 reporting errors Most people receive Forms 1099 every year, a kind of gentle reminder about payments we received during the year. These little reminders to pay your taxes are critical to the IRS information return matching program, making it very easy for the IRS to send out tax notices to collect additional taxes if your tax returns and Forms 1099 seem to be off base, a process that seems to be ever more automated. Information reporting has become a centerpiece of IRS enforcement efforts for decades, arguably even more so now. Generally, businesses must issue the forms to any payee (other than a corporation) who receives $600 or more during the year. That's just the basic threshold rule, and there are many exceptions and special rules. That's why you probably get a Form 1099 for every bank account you have, even if you earned only $10 of interest income. There's a 1099-INT for interest; 1099-DIV for dividends; 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your individual retirement accounts; 1099-B for broker transactions and barter exchanges; 1099-S for real estate transactions, and so on. In fact, there's a dizzying array. But two forms seem to prompt the most questions and cover the biggest territory. First there is Form 1099-MISC (for miscellaneous). Lawyers see these a lot and so do their clients. The two boxes on the form where dollar amounts go are box 3, for other income, and box 10 for gross proceeds paid to an attorney. Any payment reported to lawyers in box 10 does not mean it is income to the lawyer. All of it may be income, some of it may be income, or none of it may be income, it depends on the facts. And unlike money that is reported in Box 3, the IRS does not match Box 10 reporting to tax returns. To view the full text of the article, please click here.	Top Stories of March 2025 LAWSUIT REPORTING IRS Forms 1099 for lawsuit settlements often total 200% of the payment When settling a lawsuit, it's crucial to consider the tax implications of the IRS Form 1099 issued, as it can affect your reporting obligations, including self-employment taxes, and may require clear specifications in the settlement agreement to avoid complications with duplicate or incorrect reporting of legal fees. Most Lawsuit Settlements Are Taxed By IRS, But Some Are Capital Gain The IRS taxes most lawsuit settlements, and exact wording matters if you are trying to avoid that grim result. However, some settlements can be positioned as capital gain. Here are a few examples: A suit about intellectual property; A founder dispute about shares in a company; A landlord tenant dispute with a lease buyout; A suit about damage to or conversion of property; A suit about construction defects, harm to property or diminution in its value; A suit against an investment adviser for losing your money; A lemon law suit about a defective vehicle. FORGIVENESS OF DEBT INCOME Cancelled Debts Trigger IRS Taxes, Unless You Qualify For An Exception Suppose that your uncle loans you money, but later tells you not to worry about paying him back? Or suppose that you take a business loan, but the lender eventually gives up on trying to collect and tells you that your debt is forgiven? Can either one somehow be taxed? Yes, they can. With the IRS, COD is short for "cancellation of debt." Like it or not, when a debt you owe is canceled or discharged, in many cases the tax code treats the wiped-out debt as cash income to you that you must report. TAX REFUNDS IRS Releases—And Debunks—Five Tax Myths About Getting Your Tax Refund Most people are anxious for their tax refund to arrive and want to check its status. The IRS is trying to debunk what it sees as common myths about federal tax refunds. Once you file your federal tax return, if you are due a refund, it can’t come soon enough. The IRS first says you should check the status of your refund through the Where’s My Refund? tool, the IRS2Go app, or by signing in to the taxpayer’s IRS Online Account. Those are the best and most reliable ways to get updates about when your refund might arrive. Even so, from IRS Tax Tip 2025-18, here are common myths that the IRS says are circulating--and that the IRS wants to debunk. PROBLEMS WITH IRS FORM 1099 Before Filing Taxes, It Pays To Double-Check All Your IRS Forms 1099 Millions of Forms 1099 are sent out every year. Most arrive in late January or early February, reporting payments for the prior year. The IRS relies heavy on them because they allow IRS computers to keep tabs on millions of payments. Even though the IRS audits only a small fraction of tax returns, the IRS matches nearly all Forms 1099 against your Form 1040, sending automated notices to pay up if you forget to report one. Yet despite their importance, there is considerable confusion about these forms. After Legal Settlement Payment, You May Receive Two IRS Forms 1099 If you received a lawsuit settlement in 2024, you probably received an IRS Form 1099 from the defendant in early 2025. Some types of cases are exempt, but most are not. And if you receive a Form 1099, you need to report it on your taxes. But what if you also receive a Form 1099 from your own lawyer for the same money? It happens more than you might think.
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