Attorney referral fee

[cpa72]

Hi all,

Appreciate all the help and responses to my inquiries.  It is most helpful.  Here is my latest:

 A retired attorney gets a significant referral fee in 2022.  Did no work on the file, but was entitled to and received the referral fee.  Paying attorney issues a 1099-NEC (subject to se tax, of course).  

I am wondering if the treatment (NEC) may be an error and if there is a basis for having sending attorney amend the 1099 to treat it as "other income".  Again, attorney did not work on the file.

Thank you, in advance, for your responses.

[IRonMaN]

He evidently had some connections somewhere (which means he worked) to get the referral fee so why wouldn't it be on a 1099NEC?

[BobKamman]

Who can spot the ethical issue here?

Referral fees permitted for lawyers

Attorneys can share referral fees with other attorneys, as long as they comply with the governing ethics rules. Under Rule 1.1 of the Model Rules, for example, “lawyers” can only refer to competent lawyers.

Rule 1.5 (e) specifically governs referral fees between attorneys, and spells out certain requirements, including these three:

1. The division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;
2. The client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and
3. The total fee is reasonable.

https://www.attorneyatwork.com/is-it-ok-to-pay-referral-fees/ 

[sewcpa]

We printed 1099MISC for payments to attorneys rather than NEC

[sjrcpa]

Why?

[BobKamman]

Payments to attorneys.

The term “attorney” includes a law firm or other provider of legal services. Attorneys' fees of $600 or more paid in the course of your trade or business are reportable in box 1 of Form 1099-NEC, under section 6041A(a)(1).

Gross proceeds paid to attorneys.

 

Under section 6045(f), report in box 10 payments that:

• Are made to an attorney in the course of your trade or business in connection with legal services, but not for the attorney’s services, for example, as in a settlement agreement;

• Total $600 or more; and

• Are not reportable by you in box 1 of Form 1099-NEC.

https://www.irs.gov/instructions/i1099mec#en_US_2022_publink100044444

[taxes96786]

My question would be is a 1099 NEC the correct form to issue. If it isn't then it needs to be corrected by the payee before you can report it.

If he is retired and no longer filing a return form for his business this is other income with an explanation.

[IRonMaN]

I don't think so.

[taxes96786]

What don't you think so?

[IRonMaN]

It isn't other income with an explanation.  I'm sure the correct answer is buried in pub 17 somewhere.  Check it out.

[BobKamman]

Is he still paying his State Bar dues?  If not, he probably should be.  And you can deduct those on Schedule C.  Continuing education costs also, if he's required to do that to stay active so that he can accept referral fees. 

[Skylane]

It’s  income subj, SE. Even Referrals require a level of active participation. “Hey, call this attorney, they do a great job” 

Somewhere there’s a for compensation agreement or understanding.