ALTA®: 1099 Attorney Fee Reporting
April 24, 2000
The American Land Title Association has sought to minimize information reporting for real estate transactions, particularly in escrow disbursements.
A reporting requirement for payments to attorneys has been proposed by the Administration for several years because an IRS investigation found that certain attorneys were not reporting income. In addition, some insurance companies were having problems reporting claim settlement checks. Congress passed a new attorney payment reporting requirement in the "Taxpayer Relief Act of 1997" (Sec. 1021, P.L. 105-34), and the IRS proposed a rule (Reg. & 16045-5; 1999) whose implementation has been delayed to cover payments made after Dec. 31, 2000.
Under the new law, persons making payments in the course of their trade or business are required to report gross amounts paid to an attorney in connection with legal services after December 31, 1997, whether or not such services were performed for the payer. ALTA has taken the position that the reporting requirement would not apply to disbursements for legal services at residential real estate closings as those payments are actually made by the buyer or seller of the property, and therefore are not in the course of their trade or business. This is consistent with the middlemen-paying agent stance ALTA has taken for reporting of other payments, and the legal analysis is in part based on that precedent. Further, there is an exclusion to reporting for payments less than $600.00 in a calendar year.
It is readily apparent that reporting of the full mortgage loan amount would result in a gross case of over-reporting. For example, a settlement agent earns a fee of as little as $200-$500 for a settlement, while the median sale price of a residential home sale last year was $129,400. Clearly, this would result in over-reporting of billions of dollar annually.
We obtained a third party opinion from KPMG who worked with us on this issue originally. An ALTA member, Kevin Kelly of LandAmerica Financial Group, Richmond, Virginia, is presently serving on an IRS Advisory Committee for information reporting. ALTA also filed comments on proposed IRS regulations on payments to attorneys last summer, 1999. On September 22, 1999, ALTA testified at the IRS and recommended two critical changes:
(1) Identifying the payor as the source of funds in residential closings, and the closer as merely a paying agent performing a ministerial function, so that attorneys, title companies, and title and settlement agents should not be required to report payments made in the course of real estate closings, and
(2) A general exception for disbursements of mortgage loans, so that loan disbursements made to or by an attorney performing real estate settlements functions are not reported.
For a sample letter you could use to request your Representative or either of your two Senators to send their own version of the same sample letter to either House Ways and Means Committee Chairman Bill Archer (R-TX) or Senate Finance Committee Chairman William Roth (R-DE), click here for the sample letter on the 1099 attorney payments proposed rule.