Tax Write-Offs For Government Settlements Could Be Restricted

In general, fines and penalties paid to the government are not deductible. Section 162(f) of the tax code prohibits deducting ‘‘any fine or similar penalty paid to a government for the violation of any law.’’ You might think that this tax code section resolves the point. Yet despite punitive sounding names, some fines and penalties are considered remedial and deductible. That allows some flexibility, provided that the actual settlement documents do not expressly say that something is a non-deductible fine.

Companies often deduct ‘compensatory penalties,’ a maneuver affirmed in a Circuit Court ruling. Some defendants insist that their settlement agreement confirms that the payments are not penalties and are remedial. Conversely, some government entities insist on the reverse. Explicit provisions about taxes in settlement agreements are becoming more common. But barring express non-deductibility commitments, many penalties can be deducted, too.

British Petroleum, settling with the government for its role in the BP oil spill, earned a $15.3 billion tax write off for the deal. (Photo credit should read Andy Buchanan/AFP/Getty Images)

For example, the Department of Justice expressly blocked Credit Suisse from deducting its $2.6 billion settlement for helping Americans evade taxes. Same for the BNPP terror settlement, which states that BNPP will not claim a tax deduction. Sometimes the government and a defendant split the baby. Of the $13 billion JP Morgan settlement struck in late 2013, only $2 billion was said to be nondeductible. The DOJ doesn’t always disclose the terms of settlements either. But that could change.

Senators Elizabeth Warren (D-MA) and James Lankford (R-OK) have reintroduced the Truth in Settlements Act. It would increase transparency for settlements between federal agencies and corporations accused of wrongdoing. When federal agencies announce settlement agreements, they regularly tout the top-line dollar value made to resolve allegations of misconduct. However, the public value of these settlements is diminished when corporations are allowed to receive massive tax write-offs and credits from these payments. Many times, these agreements are deemed confidential and details are hidden from the American public.

This legislation would require detailed and publicly accessible disclosures of these settlement agreements and the tax write-offs that accompany them. In September 2015, the bill passed unanimously through the Senate“Republicans and Democrats agree that the transparency of our government agencies is vital to ensuring public trust, a robust democracy, and fair settlement deals,” said Michelle Surka, advocate with U.S. Public Interest Research Group. “When government agencies strike settlement deals on behalf of the American public, we deserve to know the details.”

In recent years, some of the largest settlements between corporations and federal government agencies included significant tax deductions for the corporation. British Petroleum, settling with the government for its role in the BP oil spill, earned a $15.3 billion tax write off for the deal. Though the tax code does state that fines and other penalties are not tax deductible, a consistent lack of specificity in settlement agreements has allowed companies to claim deductions nevertheless.

“Government accountability requires transparency, and that’s what this bipartisan bill provides,” Senator Warren said. “The Truth in Settlements Act will shut down backroom deal-making by shining a light on federal agency settlements with lawbreaking companies. More transparency means Congress, citizens and watchdog groups can better hold regulatory agencies accountable for enforcing laws so that everyone — even corporate CEOs — are equal under the law.” U.S. PIRG has a research report on the tax implications of legal settlements here.

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If You Pay Ransom, Write It Off On Your Taxes

If you pay hackers ransom to keep your business operating, is it tax deductible? Whether personal or business, it probably is, although the type of deduction can vary. The IRS defines a theft as the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the laws of the state where it occurred and it must have been done with criminal intent. But to claim a deduction, you don’t need to show a conviction for theft. Theft includes the taking of money or property by:

  • Blackmail.
  • Burglary.
  • Embezzlement.
  • Extortion.
  • Kidnapping for ransom.
  • Larceny.
  • Robbery.

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The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. For businesses, paying ransom or blackmail is likely to fall into the wide category of business expenses. In fact, many taxpayers try to find a business connection to virtually any legal mess. Most legal settlements in business are tax deductible, even ones that are unusual, such as Charlie Sheen’s $10 million blackmail. Even that could be deductible.

The same is usually true for big legal fees, even though in some sense they seem unreasonable. Martha Stewart paid huge legal fees on an obstruction of justice charge from the sale of Imclone stock. To pay legal fees, she sold 75,000 shares of Martha Stewart Living stock (raising $4.67 million). SEC filings revealed she sought reimbursement (as an officer and director) for $3.7 million of fees for her successful defense on the charge that she tried to lift her own company’s share price by declaring that she was innocent of insider trading.

The granddaddy celebrity legal fiasco was Michael Jackson’s molestation trial. His acquittal on child molestation charges came at a price. Some estimates put the King of Pop’s legal expenses at $20 million. I don’t know if he deducted them, but ironically, Dr. Murray, convicted in connection with his death, could probably deduct his fees as a business expense even though he was convicted. Whether facing a civil malpractice trial or a criminal trial, his legal expenses relate to his trade or business. He was treating Michael Jackson and being paid for it.

Technically expenses must be ordinary, necessary and reasonable to be deductible, but that doesn’t take much. An expense is “ordinary” even if it is once in a lifetime. Necessary is also easy. Even a payment in cash without a receipt can sometimes generate a tax deduction. In fact, tax receipts are sometimes optional. John Edwards faced a criminal trial related to his conduct in his chosen trade or business: politics. That could make it all tax deductible.

What about deducting payments to Rielle Hunter to keep her quiet? Edwards didn’t personally pay her, and the apparent source of funds was donations. The trial was about who paid her, with what funds, and whether Mr. Edwards was personally aware of it. Hush money–even blackmail–has probably been claimed on more tax returns than you might think. Bribes and illegal payments are nondeductible, but as Bill Clinton said, it depends on what the meaning of the word “is” is. One barrier is for fines or penalties paid to the government. Section 162(f) of the tax code prohibits deducting ‘‘any fine or similar penalty paid to a government for the violation of any law.’’

That includes criminal and civil penalties as well as sums paid to settle potential liability for a fine. Another no-no is deducting bribes and illegal payments. This too is often debated, for taxpayers have a big incentive to try to deduct payments. In SEC v. Bilzerian, Mr. Bilzerian paid off his stockbroker and tried to deduct it, even though Bilzerian was convicted of violating securities laws and conspiring to defraud the IRS. Bilzerian created entities to hide his ownership of stock, and when his broker lost money and found out, Bilzerian paid the broker $125,000 to make up for the broker’s loss. Bilzerian deducted it as a business expense.

Later, Bilzerian was convicted of violating securities laws, making false statements and criminal conspiracy. The IRS disallowed his tax deduction saying the related $125,000 payment had to be illegal. The IRS claimed the payment was nondeductible regardless of whether the payment itself was legal since it was made in furtherance of an illegal activity. The Tax Court ruled that only payments illegal by themselves were nondeductible. Although former House Speaker Dennis Hastert faced criminal charges over his handling of his own cash when he was extorted, Mr. Hastert could probably deduct his losses.

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How IRS Audits Can Become Criminal Investigations

The tax law is terribly complex, and mistakes are common. But what can cause your tax audit to get vastly more serious? There is no single answer. Most criminal tax cases come out of plain old civil audits, and that fact alone is frightening. If an IRS auditor discovers something suspicious in a civil audit, the auditor can notify the IRS’s Criminal Investigation Division. Notably, the IRS is not obligated to tell you that this criminal referral is occurring. In fact, normally, the civil auditors will suspend the audit without explanation. You might be pleased, thinking that the audit is over, or at least mercifully stalled so that it might not ever resume.

Meanwhile, the IRS can be quietly building a criminal case against you. Some of the pressure points are obvious. For example, one big mistake is omitting income. Whether you receive a Form 1099, W-2, K-1, or no reports at all, include all your income. Discrepancies can trigger audits, and if omissions of income are significant and do not look to be unintentional, watch out. Excess or aggressive deductions are less likely to be viewed as seriously, but some of this is a question of degree. This is especially true with items you try to write off that are clearly personal. In that sense, you may be better off if you can separate your tax life into business and personal. Many big, messy and expensive tax disputes come down to trying to morph personal into business to get a write-off.

No one likes scrutiny from IRS

No one likes scrutiny from IRS

False statements to auditors are a huge mistake. Conduct during the audit itself can be pivotal, and is one reason to hire professionals to handle it. Of course, some of what goes on at the IRS is computer matching–the endless correlation of taxpayer identification numbers and payments. Even small mismatches can be caught. Keeping good records is important, and you should keep them for six years after you file. Keep copies of your tax returns themselves forever. Moreover, you may need basis records for decades. If you buy a house an improve it over a 10 year period, 20 years later when you sell it, you’ll need those receipts.

The IRS is vast and imposing, but there is a discreet part of it that is criminal and not civil. Like the FBI, the IRS Criminal Investigation Division uses the Special Agent terminology. If you are visited by an IRS Criminal Investigation Division Special Agent, you should consult with an attorney. You are not legally required to talk to them. In fact, the Fifth Amendment to the US Constitution guarantees your right against self-incrimination. That means you can’t be compelled to be a witness against yourself in a criminal case.

You might assume that by answering a few simple questions you will not hurt yourself or your position–especially if you are just a witness. Don’t be so sure. Regardless of how adept you are at communication, speaking up may actually help the IRS build a criminal case against you. The IRS may (quite honestly) tell you that you are not the target of the investigation but merely a witness. Even so, you are entitled to retain counsel.

In the early stages of IRS criminal investigations, a person may be told he or she is a witness. You may therefore think that there is no harm in talking. You might even think that your cooperation will make it more likely that the IRS will appreciate you and leave you alone. Be careful. As the investigation continues, a witness can become a target. Even if you are convinced you are merely a witness and will remain so, the U.S. Supreme Court has ruled that you have the right to assert your constitutional privilege against self-incrimination. See Bellis v. United States.

The ramifications of getting flustered and running at the mouth can be extreme. Particularly given the fluid nature of who is a witness and who is a target, even statements you think sound innocent may not be. Suppose you are asked whether you do business with Joe or know Sally. If you answer falsely, you may face felony charges.  See 18 U.S.C. Sec. 1001.  Plus, making a false statement can be considered evidence of an attempt to conceal other criminal conduct. If you are approached and questioned by a Special Agent, ask for his or her business card. Firmly but politely state that you do not want to answer any questions and that you will have your attorney contact the Special Agent. You can fully cooperate through your attorney.

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Contingent Fee Tax Advice: IRS Allows Some, Not All

Contingent legal fees are customary in personal injury cases. Increasingly, they are the norm in employment lawsuits too. Indeed, the variety of cases in which contingent legal fees are common is still expanding. These days, even large law firms may handle some cases on contingency. So, how about paying your tax adviser a percentage of the tax money he saves you? It should not be surprising that clients ask for this. Why wouldn’t a client want legal or accounting fees tied directly to the tax result?

However, it turns out that tax advice or representation for contingent fees is the exception, not the norm. One place where contingent fees may be especially useful is where the taxpayer is trying to get money back from the IRS in a lawsuit. Tax refund suits may lend themselves to contingent fees, and the IRS has approved contingent fees in that context. Yes, that’s right, this is an area regulated by the IRS. So to start, whether your tax adviser can offer you services on a contingency depends on what contingent fees are allowed by the IRS. In regulations known as Circular 230, the IRS says that a practitioner cannot charge a contingent fee for services rendered in connection with any matter before the IRS, with three exceptions.

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The first exception is that a contingent fee can be charged in connection with an IRS audit or challenge to (a) an original tax return; or (b) an amended tax return or refund claim, if it was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return. Second, a contingent fee can be charged in connection with a refund claim filed for penalties or interest assessed by the IRS.

Third, a contingent fee can be charged in connection with any judicial proceeding arising under the Internal Revenue Code. The IRS would be happiest if your tax adviser sticks to these three permitted exceptions. However, in Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. 2014), a federal District Court held that the IRS had overstepped its authority with these rules. It is unclear where this leaves contingent fees, but the IRS still thinks it is right. What’s an example of a fee that is clearly not OK in the IRS view? Tax return preparers cannot charge a fee tied to the size of your tax refund, to how many additional write-offs they find you, etc.

Still, that leaves plenty of room. How do the IRS’s three exceptions apply in practice? Say the IRS notifies Abe that he owes $1 million in taxes. Abe hires a lawyer or accountant to negotiate an offer in compromise for him. The fee is 30% of any tax savings. This seems fine, because the $1 million tax liability grows out of an IRS examination or challenge to a filed tax return.

What if Billy asks his lawyer to sue the IRS for a refund on a contingent fee basis. He filed his 2015 return reporting ordinary income on a big contract disposition. Later, he filed an amended 2015 return, claiming that it was capital gain. He didn’t get his refund, and now he wants to sue. Billy is suing, so a contingent fee is fine. What if Billy wants a contingent fee before he files his amended return for 2015? With this timing change, a contingent fee might not be available, according to the IRS. However, under the Ridgely case, preparing an amended tax return, by itself, is not practice before the IRS. Ridgely suggests that the IRS can’t regulate this.

Tax audit disputes can be done on contingency too. Say that Dennis’s 2013 tax return was audited. His accountant represented him, but eventually, the IRS issued a Notice of Proposed Adjustment asking for $1 million in additional taxes. Can Dennis hire a tax adviser to represent him in a protest, and thereafter at the IRS Appeals Office, on a contingent fee basis? Sure, because it is about an IRS challenge to Dennis’s original return.

In all of these situations, just be aware that the IRS has views about what is permitted.

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Reverse Immigration: How IRS Taxes Giving Up Green Cards

Giving up a Green Card can involve an unpleasant tax surprise. As the IRS continues its war on offshore tax evasion, many expatriates feel caught in the crossfire. U.S. citizens and permanent residents are required to report their worldwide income on their tax returns. They also must report foreign accounts on annual FBARs. If you have a Green Card, you face the same range of tax and disclosure obligations as U.S. citizens. And FATCA, the Foreign Account Tax Compliance Act, has made it worse. Some U.S. citizens have even given up their citizenship. Permanent residents can give up their Green Cards too, but there may be a tax cost in the form of a U.S. Exit Tax.

For Green Card holders, the question is how long they have had it. A long-term resident is a non-U.S. citizen who is a lawful permanent resident of the U.S. for at least eight years during the 15-year period before their residency ends. A “lawful permanent resident” means a Green Card holder. However, you are not a “lawful permanent resident” under this rule for any year in which you are treated as a resident of a foreign country under a tax treaty, as long as you don’t waive the treaty benefits applicable to that country’s residents. Caution: holding a Green Card for even one day during a year taints the entire year.

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The Exit Tax is computed as if you sold all your assets on the day before you expatriated, and had to report the gain. Currently, net capital gains can be taxed as high as 23.8%. There are three triggers for the Exit Tax, and any one of them will make you a “covered expatriate.” First, is your net worth over $2 million? This is the aggregate net value of worldwide assets. It is not just your U.S. assets.

For married taxpayers, each spouse’s net worth is calculated separately from the other. If they own their assets relatively equally, a married couple could have a total net worth of up to $4 million without triggering the Exit Tax. However, if one spouse owns most of the assets, that spouse could be a covered expatriate, even if the other spouse owns significantly less than $2 million of assets. Some couples can gift assets to each other to bring both spouses’ net worths below $2 million. If the spouse receiving the gifts is a U.S. citizen, these gifts may escape U.S. gift tax.

But if the spouse receiving the gift is not a U.S. citizen, spousal gifts may be subject to gift tax, even if the spouse receiving the gift is a U.S. green card holder. For 2017, there is an annual exclusion of $149,000 for gifts to non-citizen spouses. If you need to transfer more than that amount to your spouse to bring your net worth to below $2 million, you would have to rely on your unified tax credit to avoid gift tax, or you would need to plan in advance to make the transfers over multiple years before expatriating.

Another exit tax trigger is whether your average net annual income tax liability is over $162,000. This is not your taxable income, but your tax liability on that income. If you are married and filing taxes jointly, you must use your net tax liability on your joint returns, even if only one of you is expatriating. This trigger can sometimes be avoided with careful planning. Filing separate tax returns (not joint returns) often makes sense. As the trigger is your average tax liability over the last five years, you may need to file separately for several years before you expatriate.

The third way you can be a covered expatriate is if you do not (or cannot) certify five years of U.S. tax compliance. If you haven’t filed, or haven’t filed properly—say you didn’t report an offshore bank account—you will need to fix that too. Fortunately, you can amend your prior tax returns (and other forms) and simultaneously also file a Form 8854 to expatriate. In effect, you sign your Form 8854 last, after you’ve signed the amended tax documents.

If you are not a covered expatriate, you do not need to worry about Exit Tax. And if you trip any of these tests, you should calculate the Exit Tax. If you are a covered expatriate, the first $699,000 of gain is shielded from the Exit Tax for 2017 expatriations. For spouses who expatriate, each spouse files a separate Form 8854, and each spouse can exclude $699,000 of gain (or nearly $1.4 million of gain combined). The Exit Tax on certain assets, notably 401(k) plans, can be deferred. However, the tax on the future distributions is generally 30%, and you cannot claim a treaty benefit to reduce the tax.

For most other assets, you can make an irrevocable election to defer payment on the Exit Tax owed. Still, the IRS wants a bond or adequate security for any deferred Exit Tax, and interest accrues until it is paid. Even if a covered expatriate has less than $699,000 of gain in his or her assets, being a covered expatriate has negative consequences. If you have friends or family in the U.S., being a covered expatriate could result in your gifts to them coming with a tax bill that they would have to pay. Even if your Exit Tax may be zero or minimal, it is best to avoid being a covered expatriate. A final, clean break from the U.S. tax system is best. In some cases, planning can reduce or even eliminate the Exit Tax, so get some professional advice and plan ahead.

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Which IRS Violations Are Evasion Or Willful Depends On The Facts

The tax law distinguishes between non-willful and willful conduct. Willfulness involves a voluntary, intentional violation of a known legal duty. In taxes, it applies to both civil and criminal violations. Big penalties and even prosecution can hang in the balance. Innocent mistakes can be forgiven, but conduct that appears to be intentional can be a different story. Many people think that even civil penalties cannot be imposed if you were not actually trying to cheat anyone. However, intent can sometimes be inferred from conduct.

The definition of willfulness causes many people to think that their conduct is not likely to be examined, and that their own knowledge is entirely subjective. If you didn’t know you had a legal duty to report income or a foreign bank account, you might reason, how can you be treated as willful? Unfortunately, it is not that simple. Take the recent case of Arthur Bedrosian v. U.S. reported here.

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In the early 1970s, he opened two Swiss bank accounts. An accountant prepared his tax returns, and Bedrosian did not inform the accountant about the Swiss accounts. In the 1990s, he finally mentioned them to the accountant, who said that he had been breaking the law for years by failing to report. Even so, the accountant said that he should do nothing. He said it would be resolved on Bedrosian’s death when the assets in the Swiss accounts would be repatriated as part of his estate. Taxes could be paid on them then, the accountant suggested.

Again, Bedrosian did nothing. But in 2007, his accountant died and Bedrosian hired a new accountant. The new accountant included the much smaller of the two accounts on Bedrosian’s  tax return—omitting the larger one.  He also prepared and filed an FBAR for Bedrosian. Even then, Bedrosian’s reporting was incomplete, omitting all of the income from the Swiss accounts. Finally, a letter from the Swiss bank warned that it was reporting the accounts to the IRS. As a result, in 2010, Bedrosian amended his 2007 return to report correctly.

The amended tax return picked up hundreds of thousands of dollars of unreported income. The IRS investigated and Bedrosian supplied documents and cooperated. The IRS was apparently ready to treat him as non-willful, imposing the $10,000 per account per year penalty for non-willful FBAR violations. But before the case was finalized, it was transwered to another IRS agent, who wrote the violations up as willful.

On July 18, 2013, the IRS sent Bedrosian a letter stating that it was imposing a penalty for willful failure to file an FBAR for 2007. The proposed penalty was $975,789, 50% of the maximum value of the account. Bedrosian filed suit in the district court claiming that the penalty was unwarranted. Both the IRS and Bedrosian moved the court for summary judgment. The district court in Pennsylvania denied summary judgment to the IRS and to the taxpayer. The IRS had slapped on the high 50% penalty for willfully failing to file an FBAR.

The court concluded that whether the taxpayer willfully failed to submit an accurate FBAR was an inherently factual question. The court said there were still genuine disputes about what Bedrosian knew about his reporting requirements, and when he knew it. In general anyone with non-U.S. bank accounts having an aggregate value over $10,000 at any time during the year must report all of the accounts. One must report even if one has a signature interest only, without beneficial ownership. And the penalties are quite high.

Civil penalties for a non-willful violation can range up to $10,000 per account per year. With a six year statute of limitations, even non-willful violations can be expensive, especially with multiple accounts. Three accounts times six years could mean $180,000 in penalties, and that is for non-willful violations. If the IRS says that your violation was willful, it is much worse. Civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account. With up to a six year statute of limitations, that could total 300% of the account value. Fortunately, the IRS says that administratively it generally will only take 100%! And then there are potential criminal penalties too. Criminal FBAR violations can draw very serious penalties, including a $500,000 fine, 10 years imprisonment, or both.

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United Settles With Passenger Drug Off Plane, But Can IRS Tax It?

After a public relations scandal that was truly one for the record books, United Airlines has reached a settlement with the passenger who was roughed up and dragged off a plane. The friendly skies slogan seems a distant memory as United has tried to fix this appalling mess quickly. The settlement figure is confidential, but the speed of the settlement could mean it was sizable.

And that was not the only quick action. United also announced several steps to prevent similar episodes. The airline now says that passengers who have arrived on an aircraft should not have to give up their seats. United said it would create a new check-in process that would allow passengers to volunteer to give up their seats for compensation. What’s more the price tag for a seat give-up has gone way up, from the old limit of $1,350 to a new ceiling of $10,000.

CHICAGO, IL – APRIL 12: Passengers arrive for flights at the United Airlines terminal at O’Hare International Airport on April 12, 2017 in Chicago, Illinois. United Airlines has been struggling to repair their corporate image after a cell phone video was released showing a passenger being dragged from his seat and bloodied by airport police after he refused to leave a reportedly overbooked flight that was preparing to fly from Chicago to Louisville. (Photo by Scott Olson/Getty Images)

As for Dr. David Dao, the physician who lost his seat and in the process suffered not inconsequential physical injuries, how much of his settlement will he get to keep after taxes? Hopefully, he won’t have to pay any of it to the IRS. Yet some of that is likely to turn on how the deal was written, and tax reporting forms like IRS Form 1099. Just about everything is viewed as income by the IRS. However, one big exception is for compensatory lawsuit recoveries for personal physical injuries and physical sickness. That money is tax-free. The rule used to be more liberal.

Before 1996, all “personal” damages were tax-free, so emotional distress, defamation, etc. also produced tax-free recoveries. But since 1996, your injury must be “physical.” Taxpayers routinely argue in U.S. Tax Court that their damages are sufficiently physical to be tax-free; the IRS usually wins these cases, but not always. Dr. Dao’s case seems pretty clear, considering how badly he was roughed up. But often the IRS draws a line between some physical injuries and some that are merely emotional.

The IRS says symptoms of emotional distress are not physical. Money you receive for physical symptoms of emotional distress (say headaches and stomachaches) is taxed, while physical injuries or sickness is not. Many legal disputes involve multiple issues, so there’s a good chance the total settlement may involve several types of consideration. It is almost always best for plaintiff and defendant to try to agree on what is being paid and its tax treatment. Such agreements aren’t binding on the IRS or the courts in later tax disputes, but they are rarely ignored.

Dr. Dao settled so quickly that there are clearly no punitive damages or interest in his settlement. But often there are, and punitive damages and interest are always taxable. If you are injured in a car crash and get $50,000 in compensatory damages and $5 million in punitive damages, the former is tax-free. The $5 million is fully taxable, and you can have trouble even deducting your attorney fees. Whether you pay your attorney hourly or a contingent fee, factor in the cost of your attorney when you address taxes. If you are the plaintiff and use a contingent fee lawyer, you will usually be treated (for tax purposes) as receiving 100% of the money recovered by you and your attorney, even if the defendant pays your lawyer directly his 30% to 40% contingent fee cut.

If your case is fully nontaxable (say an auto accident in which you’re injured), that should not cause tax problems. But if your recovery is taxable, lawyers’ fees are likely to be hard to deduct. The legal fees are usually subject to numerous limitations, including the alternative minimum tax or AMT. That is one reason among many that settling a case before trial–and hopefully avoiding the taint of punitive damages–can pay off.

It is worth running some numbers and considering how IRS Forms 1099 will prepared in advance. You will almost always have to consider such points at tax return time the next year. It is better to consider taxes earlier when you can often improve the result. As for Dr. Dao, he should have a strong case not to pay taxes. But if he receives a Form 1099 for the money–and he may not know that until January of 2018, he will need to report and explain it on his return.

 

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