An insured signs an assignment of benefits agreement with a vendor and has work performed on the property.

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Q. (cont.)

When we (the insurer) deny payment of the invoices, the vendor takes us to court to collect funds. We issue two payments, both made out to the vendor and attorney: one for the invoice payment and the other for attorney costs and fees. Both payments were made from the insured’s home owner’s policy. Since the attorney was a payee on both checks, we have reported the total amount in box 14. Was this correct?

A.

We spoke with IRS information agent Mr. Repp (ID #1003080021), who stated that you were correct to report the proceeds of both checks to the attorney in box 14. You would also issue a 1099-MISC to the vendor, reporting the gross amount of the checks in box 3. (This presupposes that you do not know the allocation of the funds distribution between the vendor and the attorney.)

Although this does not impact your organization, the vendor would then need to report this entire amount as income to the IRS, but would need to get a receipt from the law firm for the portions of both checks that were allocated to the attorney in order to be able to deduct that amount from their income. (This assumes that you yourself do not know the funds allocation of the checks between the two parties.)

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