Attorneys and law firms with deferred legal fee arrangements, take note: The IRS is watching. According to the tax agency, some taxpayers have delayed recognizing contingency fees as taxable income by transferring up to 40% of individual case settlements to third parties. In such arrangements, third parties generally hold the transferred fees for at least 20 years. Only when the fees are returned do attorneys recognize them as taxable income. The IRS’s new crackdown on such arrangements requires taxpayers to recognize settlement amounts in the year they’re transferred to a third party. To avoid possible penalties, they must use Form 8275. Contact us with questions.
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