When a debt collector or credit bureau messes with my bankruptcy clients, I try to make them pay. (You for your trouble. Me for doing the work.) They want you to pay–taxes!
To avoid that, our settlement agreements need to specify how much is attorneys fees, and how much is your share.
I’m a bankruptcy lawyer–that’s what I do. That’s “almost” all I do.
I’m a bankruptcy lawyer. To protect my bankruptcy clients, I also sue debt collectors, credit bureaus, illegal payday loans and debt settlement scammers. I’m not a tax lawyer, but we need to talk about taxes.
I figured out, maybe ten years ago, that I needed to do more. Lots of people I see have been getting illegal debt collector calls or have illegal wrong stuff on their credit reports. So, while I’m not an expert, I’ve learned how to enforce the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.
I also see people stuck with illegal payday loans, or scammed by illegal debt settlement schemes. So, besides bankruptcy law, I sue on that stuff, too. Mostly under the Virginia Consumer Protection Act.
Also, one or two people a month after bankruptcy have a creditor that pops back up who needs to be slapped down. I use the bankruptcy law for that.
If you come to me for a new start, I really want to get you that new start.
When I sue on that stuff, I try to do three things.
First, get you relief. Make them stop!
Second, get me paid by THEM. (That way I can afford to do it. Plus they are genuinely sorry for what they did, if they have to pay your lawyer.)
Third, get you a little money for your time and trouble.
The way I see, you should pay taxes on your share. I should pay taxes on mine. Surprisingly, the law on that is not real clear.
All those laws have provisions that your lawyer (that’s me) gets paid when you win. Your lawyer gets paid on top of what you get, because the law says so. Otherwise, you could not afford a lawyer to fight for you.
For most of the last ten years, when we’ve settled those cases. (I like to settle–I’m a reasonable guy.) They have agreed to write the check to me–so I pay taxes on the whole amount. Then I write a check to you; you should pay taxes on that.
The tall building lawyers who work for the outfits we sue, want you to pay taxes on the whole thing. They say they are only following orders from the IRS, but I can tell they really like this idea. If you have to pay taxes on my money, your taxes can be more than you get. At that point, nobody can afford to sue them, and the debt collectors and credit bureaus can get away with whatever.
(You could deduct what you had to pay me. For a lot of people, that deduction doesn’t work very well. If you take the standard deduction (most people who rent take the standard), it doesn’t help you at all. Otherwise it’s a miscellaneous deduction. It has a threshold (a “deductible” on your deduction.) And a phase out. More on that here.)
So if I have to do a lot of work, and you only have a little trouble, your taxes on my share, even after the deduction, can eat up everything you get and more.
The Supreme Court helped us out, in a case called Commissioner of Internal Revenue v. Banks. Banks had won $464,000 in a discrimination case–he paid his lawyer $150,000. He didn’t file taxes on any of it. The IRS was hacked when they found out.
Anyway the Supreme Court said Banks had to pay taxes on the whole thing, because there was nothing in the court order or settlement that said what part of it went to the lawyer. That should mean, you don’t have to pay taxes on my share if the court order or settlement does say what part of it goes to your lawyer. “In lieu of statutory fees” is what Banks said we should say.
If there’s a court order, that’s easy. Like I say, all these laws provide that your lawyer gets paid on top of what you get.
When we settle these cases, that needs to be in the settlement, too. (This IRS handout that says that. The settlement agreement “may include allocations to…attorneys fees.” The IRS “will not disturb” that agreement.) That means I need to tell them, and they need to agree, to write two checks. One to you and one to me. “In lieu of statutory fees.”
I don’t like to tell them our split. But I like that better than you paying taxes on money you don’t get.
I’m not a tax guy; I’m not a tax guy; I’m not a tax guy. I am NOT telling you what the IRS will do. Just what I can do, to put you in the best position with them.
PS The Lee v Javitch case in Ohio, an FDCPA case, lays the groundwork for taxing my share and yours separately. (It’s not a tax case–it’s a fee agreement case.)
Also, Private Letter Ruling 201015016 which states:
“Taxpayer’s case is distinguishable because Taxpayer had no obligation to pay attorneys’ fees. In fact, Taxpayer’s agreement (retainer contract) expressly provided that [Legal Aid] would not charge Taxpayer any fee for legal services. In addition, Taxpayer had no retainer contract with (and did not otherwise agree to pay any fees to) [the other legal aid organization or assisting private law firm] for their legal services. Rather, [Legal Aid and law firm] requested attorneys’ fees directly under the provisions of Section X of the [consumer protection act]; they did not seek attorneys’ fees on behalf of Taxpayer or in lieu of Taxpayer’s contingency fee obligation.”