Incorrect Reporting of Settlement or Award Income on 1099-MISC: How to Address the Error?

We frequently receive inquiries from clients regarding discrepancies on their 1099-MISC forms, where the reported amount includes the full amount rather than the actual amount received by the clients after accounting for the attorney’s share. As a result, clients are burdened with higher taxes.

Issue: Clients are being taxed on a portion of funds they never actually received. How can we rectify this issue?

Below are the recommended steps to address this matter:

• Engage with Your Attorney: Initiate communication with your attorney, who is prepared to furnish the necessary documentation. Obtain a detailed invoice or statement from your attorney, explicitly indicating the fraction of the settlement or award allocated to their fee.
• Amend the 1099-MISC: The entity that issued the erroneous 1099-MISC should have been aware of the attorney’s remuneration and consequently should not have included it in the form. If this was a lapse on their part, communicate the circumstances to them. They may require documentation from your attorney to substantiate the revision.
• Request Corrected Documentation: If the issuer acknowledges the mistake, they should provide you with an amended 1099-MISC, accurately reflecting the sum you received after accounting for the attorney’s portion. This revised form must be submitted to the IRS to ensure precise tax reporting.
• Tax Filing: In case you have already submitted your taxes using the erroneous 1099-MISC, you might need to revise your tax return upon receipt of the corrected form. This can be accomplished by submitting Form 1040X, which is the Amended U.S. Individual Income Tax Return. Clearly elucidate the modifications and supply essential corroborative paperwork.
• Document Preservation: Maintain meticulous records of all exchanges, receipts, invoices, and other pertinent documentation throughout this process. These records serve as evidence of the accurate figures in case of potential IRS inquiries.

Our Assistance:

• We can assist you in ascertaining reasonable amounts.
• Evaluate tax implications of correction versus non-correction.
• Determine the optimal timing for addressing the aforementioned situation.
• Propose alternative strategies if the issuer is unwilling to rectify the error.
• Preventive measures for such situations proactively through effective planning.
• File your tax return or amend the initial filing to accurately reflect the amount, thus optimizing your tax liability.

Should you find yourself grappling with similar scenarios and require expert guidance, feel free to contact us below. We possess the experience and expertise to manage such circumstances and secure the maximum tax advantages when filing your taxes.