NCPA - National Center for Policy Analysis


January 25, 1996

When a lawyer receives a settlement on behalf of his client, the IRS learns about the money only if the lawyer includes it on his tax form. But this may be about to change.

Although Congressional Republicans have added a provision to their budget bill to require reporting of the tens of billions of dollars in legal settlements paid each year, the President did not include this revenue raiser in his own budget. Some wonder if this "oversight" was not due to the political clout of trial lawyers.

Currently, payments to lawyers are reported when they are in the form of salaries or consulting fees. That, however, leaves a giant gap for income from lawsuit settlements.

  • Lawyers usually get one-third of any settlement -- sometimes more.
  • If a defendant settles for, say, $300,000, the money is typically paid by check to the lawyer, who writes out a check for $200,000 to his client and pockets $100,000 -- or splits that with another lawyer in the instance of referral cases.
  • An IRS study begun in 1989 found that 10 percent of lawyers never even bother to file tax returns -- even though conviction for tax evasion usually leads to disbarment.
  • Tax evasion in referral cases is more difficult to detect, and the amounts of income involved have been estimated at $3 billion to $4 billion annually.

Total taxes evaded have been estimated, conservatively, at $25 million to $50 million a year.

Source: Peter Passell, "Washington May Tighten Up On Reporting of Fees By Trial Lawyers," New York Times, January 25, 1996.


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