When the bank I work for denies payment of the invoices, the vendor takes us to court to collect funds. We issue two payments made out to both the vendor and attorney – one is 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?
I spoke with IRS information agent Mr. Repp (ID #1003080021), who told me 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 claimant, reporting the gross amount of the checks in box 3.
Although this does not impact your organization, the claimant 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 his income. (This assumes that you yourself do not know the funds allocation of the checks between the two parties.)