Tax

Have a tax question? Ask a tax Expert

Ask an Expert,
Get an Answer ASAP!

This answer was rated:

Hypo: a tenant is forced from their home, due in part to negligence…

Hypo: a tenant is...
Hypo: a tenant is forced from their home, due in part to negligence or wrongful behavior by a landlord, sues the landlord. The tenant's attorney breaks his professional obligations, the tenant finds this out, and the attorney withdraws which puts the entire case in jeopardy. On his own, the tenant gets a settlement from the landlord's insurance company, however, the amount would have been much bigger if the tenant's attorney had kept his / her professional obligations. The settlement check covers only expenses (from the past and within the next 5-10 years) incurred from the tenant being forced out of his home into a more expensive place (not pain and suffering). Two settlement checks are issued. One is from the landlord's insurance company to the tenant. The other is issued from the insurance company to the tenant's former attorney (as that amount is in dispute between the tenant and former attorney). The tenant's former attorney and the tenant later settle for more or less the expenses the former attorney incurred. The former attorney also demands that the way the firm handled or mishandled the case not be made public knowledge. The tenant agrees.

Questions:
1. Does the tenant's attorney now have to issue a 1099 MISC to the tenant for the amount that the tenant kept from the check issued to the attorney from the insurance company? 2. If the tenant has receipts to show that the expenses incurred, due to higher rent payments (whereas past place was rent controlled), moving, and commute expenses, over the next 7 years were greater than the total of the 2 settlement checks, can the tenant treat both the payments non-taxable? 3. Can the settlement be treated as regular income or must it be taxed as if the tenant was an independent contractor? 4. Would the tenant be likely to raise a red flag and/or an audit if he/she did not report the income as taxable? 5. How long should the tenant hold onto receipts related to the case and costs to prove that he / she lost money despite the settlement award?
Show More
Show Less
Ask Your Own Tax Question
Answered in 1 hour by:
2/18/2013
Jesse Handel
Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 309
Experience: 10 years tax preparation. IRS Registered Tax Preparer.
Verified

Hello and thank you for coming to our website. We appreciate the opportunity to help you with your questions. I hope that this issue doesn't affect you personally, because the IRS rules that apply are going to seem very unfair under the circumstances; however, they are the rules.

 

To take your questions in order:

1. If the amount that the tenant kept from the attorney is over $600 and, if there is paperwork showing that money as a payment from the attorney to the tenant (if there was written notification or information that the money the insurance company issued to the tenant's attorney would go to the tenant), then the lawyer should issue a 1099-MISC to the tenant. The attorney will probably also want to do this if he/she can justify it because it allows him/her to remove that amount of money from the attorney's taxable income. If the attorney issues a 1099-MISC to the tenant, the amount the tenant received should be reported in Box 3, Other Income; rather than Box 7, Nonemployee Compensation. This is covered in the instructions on filling out Form 1099-MISC. It sounds as if there was no punitive part to the legal settlement. If there had been, that amount would have been listed in Box 3 on a 1099-MISC issued from the insurance company to the tenant.

2. Unfortunately, since ordinary living expenses aren't included in any tax deductions or issues (except when job-related), the expenses associated with this case can't be used to offset any of the taxable legal settlement. The IRS has ruled that legal settlements not involving physical injury or disease are taxable income.

3. The amounts the tenant received for the settlement should be reported to the tenant and the IRS on 1099-MISC, Box 3, "Other Income". The amounts should be reported as "Other Income" on the 1040 Form. Since this income is not in Box 7 and was not involved in any way with employment or services received, this income won't be reported on a Schedule C and it won't be subject to the self-employment tax. Any attorney's fees can be deducted on Schedule A, as expenses subject to the 2%-of-AGI limit.

4. If 1099-MISCs are reported to the IRS, the IRS will either reject the return if it doesn't reference the 1099s that the IRS received or they will definitely come after the taxpayer. The IRS receives copies of all of this paperwork and their computer program matches forms received with the taxpayer's Social Security Number with the income and forms reported on the return as one of the first checks a return goes through when it is processed.

5. The receipts won't matter because the IRS won't allow them to be used to offset the settlement income. All other papers relating to this issue should be stored for a minimum of 3 years, the normal time period the IRS goes back on audit. A maximum of seven years wouldn't be a bad idea, because if the IRS decides there may be fraud involved in the tax return, they can go back seven years. Actually, there is no real previous year at which the IRS can't demand to see documents, since the statute of limitations doesn't begin until the tax fraud is found, so there isn't really a statute of limitations on the IRS. They rarely go back more than 3 years and almost never go back more than 7 years. In general, they only go back more than 3 years if they find or think they've found an ongoing pattern of fraudulent returns.

6. If the tenant paid the former attorney $600 or more in 2012, then the tenant should issue a 1099-MISC to the attorney with the payment reported in Box 7.

 

Here is the information from the IRS website about legal settlements: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Lawsuits,-Awards,-and-Settlements-Audit-Techniques-Guide#_Toc305586646

 

Here is where you can find the information about preparing and filing Form 1099-MISC:

http://www.irs.gov/pub/irs-pdf/i1099msc_12.pdf

 

Here is the actual form 1099-MISC: http://www.irs.gov/pub/irs-pdf/f1099msc_12.pdf

 

I hope this information answers your question satisfactorily. If you need more information about this question or clarification of any information that I've provided, I'll be happy to continue working with you on this question until you're satisfied.

 

Ask Your Own Tax Question
Customer reply replied 5 years ago

Excellent replies thus far; I apologize for the delay but before finishing I have a few additional questions.


 


What if the tenant did pay the attorney and/or the attorney's law firm, more than $600 in 2012, but, due to poor relations between parties, the tenant cannot obtain the attorney's social security number and/or the attorney's tax payer ID number (EIN)? - - Ie - without this information can a 1099 MISC be filed against the former attorney or will the IRS not allow it?


 


------


 


Now assume that the tenant does get ahold of the attorney's / attorney's firm's taxpayer ID information.


 


If the attorney claims the payment received was less than his or his firm's expenses put into the case, can the tenant still file a 1099 MISC against his former attorney (ie - force the attorney to explain to the IRS that the payment received was less than the expenses created to receive this income)?

The attorney is required by law to provide his EIN or SSN, whichever he uses to designate his business. If the attorney refuses to provide that information, then you can use Form W-9 "Request for Taxpayer Identification and Certification" to obtain the information. An attorney is required to promptly supply its TIN and is subject to a penalty under Section 6723 and its regulations if they refuse. The details can be found on www.irs.gov "Instructions for Form 1099-MISC" 2012 edition, page 2.

 

The attorney's expenses are irrelevant to the filing of a 1099. As long as you have checks or other documentation that you paid the attorney more than $600, you are required, not just allowed, to issue a Form 1099-MISC. He has to explain his expenses on his tax return. That part is his problem, not yours.

 

Hope this helps. Good luck in your fight. Let me know if you need more information.

Jesse Handel
Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 309
Experience: 10 years tax preparation. IRS Registered Tax Preparer.
Verified
Jesse Handel and 87 other Tax Specialists are ready to help you
Ask your own question now
Customer reply replied 5 years ago

FYI - I've been informed that several parts of this answer may be incorrect. Basically, if one is not engaged in the trade or business of engaging attorney's services for property / tort claims one does not need to issue a 1099 to an attorney (per http://www.irs.gov/pub/irs-pdf/i1099msc_12.pdf). Also, if the settlement was not to reimburse lost wages (income) but physical injury / losses incurred by the tenant claimant due to the injuries then to that extent the settlement funds are not taxable to the tenant / claimant. However, the funds paid to the attorney may be considered income to the attorney. Actually my understanding on this is not fully clear but this is the gist from of another expert opinion. Nonetheless, I appreciate your earlier feedback; thanks.

You are correct about the 1099-MISC being allowed, but not required. The law that required the issuance of the 1099-MISC was passed as part of the Affordable Health Care Act and then removed by Congress later. The tenant isn't required by law to issue a 1099-MISC to the attorney, however if the tenant wants to deduct the amount paid to the lawyer as Schedule A expenses subject to the 2%-of-AGI limit, the 1099-MISC will be the strongest documentation of this expense and will ensure that the attorney is taxed for the income. However, as long as the amount paid to the attorney can be proven from receipts or other documentation, the 1099-MISC is optional not required.

In retrospect, I did word this answer very poorly. The insurance company should not issue a 1099-MISC form to the tenant, because the money provided by the insurance company is straight reimbursement. If the insurance company did issue a 1099-MISC for this part of the settlement, then the tenant should include a statement with his/her tax return that the 1099-MISC was issued for nontaxable reimbursement of actual expenses.

The money paid to the tenant by the former attorney is much less clear-cut. It is easy to prove if audited that the insurance settlement offsets actual expenses, however, the money paid by the former attorney because the tenant could have received a larger settlement had the attorney not been negligent could be considered (and in my opinion, would be considered) to be punitive damages rather than related to actual monetary losses. There is no way to prove any actual monetary loss to the tenant that is being paid for by the attorney and that would make the attorney's part of the settlement taxable income. I apologize that I failed to clearly differentiate between the two types of settlements.

Thank you for a chance to correct and clarify my answer. I'm sorry that I wasn't as accurate and clear as I should have been.
Ask Your Own Tax Question
Customer reply replied 5 years ago

Hmm...This long answer / explanation is helps me understand some concepts or issues that I had not understood earlier. Thanks for taking the time to clarify in such detail. Thank you again!

Was this answer helpful?

How JustAnswer works

step-image
Describe your issueThe assistant will guide you
step-image
Chat 1:1 with a tax professionalLicensed Experts are available 24/7
step-image
100% satisfaction guaranteeGet all the answers you need
Ask Jesse Handel Your Own Question
Jesse Handel
Jesse Handel
Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 309
309 Satisfied Customers
Experience: 10 years tax preparation. IRS Registered Tax Preparer.

Jesse Handel is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,338 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,512 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

PhillipsEsq.

PhillipsEsq.

Attorney-at-Law

59 satisfied customers

B.A., M.B.A, J.D.

Robin D.

Robin D.

Senior Tax Advisor 4

15,569 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,655 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

< Previous | Next >

Related Tax Questions
What exactly does 100% tax deductible mean? If I were to
What exactly does 100% tax deductible mean? If I were to spend $5000 on something that is 100% tax deductible, how much of it will I get back when I file my income tax?… read more
Dr. Fiona Chen
Dr. Fiona Chen
President
Ph.D.
1,435 satisfied customers
A company has paid rent to its landlord for over a year by
A company has paid rent to its landlord for over a year by valid check on a funded commercial bank account. However, because of a dispute over the lease, the landlord has not cashed the checks. And no… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,569 satisfied customers
I have a client who was given $10,000 in order to vacate the
I have a client who was given $10,000 in order to vacate the rental apartment in which he lived. Is this taxable income?… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
I am engaged in a joint venture, a chiropractic clinic,
I am engaged in a joint venture, a chiropractic clinic, whereby the joint venture doctor pays all his expenses for his office location: rent, utilities, office supplies, equipment, etc. Then I reimbur… read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
LEASE TAX QUESTION: Do real estate taxes, uncollectable from
LEASE TAX QUESTION: Do real estate taxes, uncollectable from a responsible tenant , qualify as worthless (uncollectable) debt for tax purposes?When: 1)the property is small commercial property,2)when … read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
I understand a lesser should pay property taxes on a rented
I understand a lesser should pay property taxes on a rented commercial property, however Is it legal for a lessor to collect real estate taxes from a lessee?… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
I have plan to purchase rental property and file a Sch E
I have plan to purchase rental property and file a Sch E with my tax return for rental income. I am worried about any responsibility/liability for tenant's physical injuries and any damage/loss. how c… read more
CFEPro789
CFEPro789
Fraud Analyst
Master\u0027s Degree
369 satisfied customers
if a tenant is bought out form a stabilized apartment, are
if a tenant is bought out form a stabilized apartment, are th emotes received this way treated as a regular income? What about the settlement reached as a compensation for damages and harassment - is … read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
15,569 satisfied customers
This is for PD Tax. Often leases of business property are
This is for PD Tax. Often leases of business property are in the form of “net leases” which require the tenant to pay not only rent but some specified expenses of the landlord that are directly relate… read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
We need wording to be used in a settlement document with an
We need wording to be used in a settlement document with an insurance company. The defendents attorney is willing to write someting in that might be helpful with us claiming a loss with the IRS. Our l… read more
socrateaser
socrateaser
1,031 satisfied customers
In California if the tenant pays the Homeowners association
In California if the tenant pays the Homeowners association dues, is it rental income to the lanlord… read more
keeperumiami
keeperumiami
Sr Financial & Tax Consultant
Bachelor\u0027s Degree
1 satisfied customers
I have a client who has a massive fire at their business location.
I have a client who has a massive fire at their business location. They rent the building from her father who owns the building. The building is fully depreciated. Some of the insurance checks came in… read more
PDtax
PDtax
Owner
Master\u0027s Degree
1 satisfied customers
Form 1099 - Rent Regarding the total rent to be reported,
Form 1099 - Rent Regarding the total rent to be reported, does it also include the real estate taxes and operating escalation charged back to us? For vendors taxed as Subchapter S, please confirm that… read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
landlord files bankruprtcy home has renters do they contiue
landlord files bankruprtcy home has renters do they contiue paying rent to receives money once filing is approved… read more
Richard
Richard
Tax Attorney
Doctoral Degree
4,512 satisfied customers
I have a leasing agreement with my house landlord and she signed
I have a leasing agreement with my house landlord and she signed that agreement without stating that there will be a property management. now after 9 months of the lease she wants to get a property ma… read more
Wallstreet Esq.
Wallstreet Esq.
Tax Attorney
Doctoral Degree
586 satisfied customers
I own a house that was damaged by expansive soils and a foundation
I own a house that was damaged by expansive soils and a foundation that was not suitable for the soil conditions. The builders insurance company had to be sued to award a claim. The attorney was paid … read more
RD
RD
Self Employed
Master's Degree
1,164 satisfied customers
I am a Leasing Agent that must file a 1099 on the ...
I am a Leasing Agent that must file a 1099 on the income that I pay to my Landlords. I accept the Rent, pay all associated expenses and disburse the balance to the Landlord monthly. When preparing the… read more
Mark D
Mark D
Enrolled Agent
Master's Degree
1,338 satisfied customers
How do I report insurance reimbursement on Schedule E
BASIC FACTS I am retired, and my retirement income is reported annually to me on form CSA 1099R. My annual retirement income is considerably less than $100,000 [relevant to passive activity loss limit… read more
RD
RD
Self Employed
Master's Degree
1,164 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x