1 LITIGATION & DIVORCE TAX TRAPS & TIPS PRESENTED TOHOUSTON BAR ASSOCIATIONBYFINIS COWAN, CPA, Tax LL.M. ATTORNEY AT LAW COWAN & CO. 12 GREENWAY PLAZA, SUITE 1100 HOUSTON, TEXAS Phone: Fax:ALAN D. WESTHEIMER. CPA/CFF, CFE5120 WOODWAY, SUITE 9020HOUSTON, TXPhone: Fax:NOVEMBER 12, 2010
2 HIGHLIGHTS OF TAX CONSEQUENCES OF DIVORCE A QUICK REFERENCE GUIDECopyright 2010 by the American Institute of Certified Public Accountants, Inc. All rights reserved. Reprinted with permission.
3 Filing StatusMarital status for tax filing is set as of the last day of the year – December 31.If you are divorced as of December 31, you must file as single taxpayers (or head of household) for that year – even if you lived together as a married couple more than half the year.If you are married as of December 31, you must file as married - either joint return or separate returns.# 3, separate before June 30 & don’t let him/her spend even one more night in house: HOH.I see too many June separations for it just to be convenience.
4 Filing StatusIf you are still married as of December 31, you can file joint, separate, or as head of household (if you lived apart for the last 6 months of the year and otherwise qualify).Caution: Filing separate and use of the standard deduction or itemized deductions - the first one to file establishes requirement that the other do the same.Caution: Joint return = Joint liability no matter what the divorce agreement says.There is no “legal separation” in Texas. Texas, however, does recognize temporary orders to be filed at the time the divorce is filed. This can help you make impermanent changes while the proceedings are going on.
5 Filing Status Head of Household Status To qualify as head of household, you must be divorced or legally separated on December 31.You must have paid more than half the cost of maintaining a home for the year for a child or other qualifying person for whom you or the other parent is entitled to claim the dependency exemption and that person lived with you in the home for more that half the year.Tax rates are in between married filing joint and married filing separate rates.
6 Year of Divorce Return – Community Property State Since divorced as of December 31, must file separate returns as single or head of household.Community income and expenses of both parties from January 1 through the date of divorce split 50/50 on their separate returns.
7 Year of Divorce Return – Community Property State 100% of entire year’s separate income and 100% of individual income and expenses from date of divorce through December 31 reported on separate returns.These rules do not apply if:Enter into Tex. Family Code §7.002(c) agreement - avoids splitting partial year income in the year of the divorce for tax purposes, OR
8 Year of Divorce Return – Community Property State The parties live apart the entire year, and they do not transfer more than a de minimis amount of earned income to each other or for benefit of children, OROne spouse acts as if solely entitled to such income and fails to notify the other of it before the due date for filing his return, ORSpouse has no reason to know of income and inequitable to include it in her income.A and C only apply if there is no joint return. I think of A as “Abandoned Spouse,” B as “Ignorant Spouse + Greedy Spouse” and C as “Ignorant + Unfair.”
9 Children/Dependency Exemptions Custodial parent is entitled to the dependency exemption.Parents, together or separately, must provide at least one-half of the child’s support.
10 Children/Dependency Exemptions Two exceptions to the general rule that the custodial parent is entitled to the dependency exemption:A Multiple Support Agreement is in place –IRS Form 2120.The custodial parent relinquishes the right to the exemption - either annually or permanently - IRS Form 8332.
11 Transfers Of AssetsUnder IRC §1041, no gain or loss is recognized on transfers if incident to divorce.The transferee’s tax basis is equal to the transferor’s tax basis immediately before the transfer.A transfer is “Incident to Divorce” if it:Occurs within one year after the divorce, or
12 Transfers Of AssetsIs related to the cessation of the marriage, meaningPursuant to a divorce or separation agreement, andOccurs within six years after the date on which the marriage ended.Property acquired after the marriage ends qualifies for this treatment if all the other requirements are met.I’d expect a Q about the last point. You mean a divorce decree can say H shall transfer after-acquired property to W within 6 years and it’s Incident To?
13 Costs of Getting Divorced Legal and professional fees as well as court costs related to getting a divorce are generally not deductible.Payments of your former spouse’s attorney or other professional fees are also not deductible, unless they meet the requirements of deductible alimony payments.
14 Costs of Getting Divorced Nondeductible Costs:Expenses paid for arranging child custody and support.Expenses paid for arriving at a financial settlement and retaining income-producing property.Expenses paid to resist alimony.
15 Costs of Getting Divorced Deductible Costs (Legal and/or Accounting):Fees paid for tax advice related to a divorce.Fees paid to determine or collect alimony.Fees paid to determine estate tax consequences of property settlement.
16 Costs of Getting Divorced Fees paid to professionals such as appraisers and actuaries if the services were performed to determine the correct amount of tax or to assist in obtaining alimony.Fees paid to obtain deductible breakdown from the attorney or accountant.
17 Costs of Getting Divorced Deductible expenses will be treated as miscellaneous itemized deductions subject to the 2% limitation, andThey are also preference items for Alternative Minimum Tax (AMT) purposes.
18 Alimony vs. Child Support Qualifications for Alimony TreatmentCash payments or third-party payments required under divorce or separation agreement.Payments must be required by written agreement or decree.Agreement may not designate the payments as “not alimony.”Parties may not be members of the same household.
19 Alimony vs. Child Support Payments may not be treated as child support.Payments MUST cease upon death of the recipient or payer.Parties may not file a joint return.
20 Alimony vs. Child Support Tax Treatment of Alimony:Includible For Adjusted Gross Income by Recipient.Deductible From Adjusted Gross Income by Payer.
21 Alimony vs. Child Support Payments that do not qualify as alimony:Child support, including payments that vary with the status of a child, e.g., educational attainment, disability, or marital status.Non-cash transfers.Payments that are the spouse’s part of community property income.Payments for the use of property.Payments to keep up the payer’s property.
22 Alimony vs. Child Support Recapture of AlimonyTo prevent excess front-loading of alimony.Recapture rules may apply if there is a decrease or termination of alimony during the first three calendar years of payment.Recapture rules apply if alimony paid in the second or third calendar year is $15,000 less than in the prior year.
23 Alimony vs. Child Support Payer party must include the excess in Adjusted Gross Income (i.e. “recapture” it) for the third calendar year of payment.The same amount is deductible by the payee party For Adjusted Gross Income for the payer’s third calendar year of payment.However, no recapture if either party dies or the payee party remarries before the end of the third calendar year of payment or if reduction is beyond control of payer, e.g., disabled or laid off.
24 Alimony vs. Child Support Child Support Before AlimonyIf obligated to pay both alimony and child support, but pays less than monthly amount due, payments first applied to satisfy the child support obligation.Child support obligation must be met before any amount of alimony is deductible.
25 Personal ResidenceCapital gain exclusion of $250,000 (single) and $500,000 (married) from sale of principal residence.“Principal Residence” – home where you lived for any two of the last five years.If ownership is transferred incident to divorce, the time of the former spouse’s ownership is added to the recipient’s period of ownership for calculating the two year requirement.
26 Retirement Plans and IRAs Qualified Domestic Relations Order (QDRO) – Court can allocate an interest in a qualified retirement plan to a non-employee spouse (alternate payee).To qualify as a QDRO, funds must be distributed to the alternate payee or his or her designee directly from the retirement plan.
27 Retirement Plans and IRAs Payments made to the alternate payee under a QDRO have no effect on the participant in the retirement plan.Benefits are taxed to the alternate payee when payments are received (however, not subject to the 10% early withdrawal penalty).Or, funds may be rolled over tax-free into an IRA or other qualified retirement plan.
28 Retirement Plans and IRAs QDROs can be very complicated and costly to set up; a specialist is typically hired to do them.IRA transfers pursuant to a divorce or separation agreement are not taxable. Methods of transfer include:Changing the name on the account, andMaking a direct trustee-to-trustee transfer of IRA assets.
29 Retirement Plans and IRAs Divorce or separation agreement should state that the IRA transfer is intended to be tax-free under IRC §408(d)(6).QDROs do not apply to IRAs.Spousal IRA Contribution – if final decree is obtained by the end of the tax year, a spouse cannot deduct contributions made to a former spouse’s IRA unless it qualifies as alimony.
30 Retirement Plans and IRAs Withdrawing funds from an IRA to satisfy a divorce judgment causes the IRA owner to be taxed on the distribution, and if applicable, to also incur the 10% early withdrawal penalty.
31 Stock Options & Deferred Compensation Revenue RulingA taxpayer who transfers an interest in non-qualified stock options and non-qualified deferred compensation to his or her former spouse incident to divorce is not required to include an amount in gross income upon the transfer.
32 Stock Options & Deferred Compensation The former spouse, and not the taxpayer, is required to include an amount in gross income when he or she exercises the non-qualified stock options or when the deferred compensation is paid or made available to him or her.
33 Stock Options & Deferred Compensation The same treatment would apply in a case in which an employee transfers a qualified stock option contrary to its terms to a spouse or former spouse incident to divorce.The qualified stock option would become disqualified and be treated in the same manner as other non-qualified stock options.This ruling does not apply to transfers of property between spouses other than in connection with a divorce.
34 Stock Options & Deferred Compensation This ruling also does not apply to transfers of non-qualified stock options, unfunded deferred compensation rights, or other future income rights to the extent such options or rights are unvested at the time of transfer or to the extent that the transferor’s rights to such income are subject to substantial risks of forfeiture at the time of the transfer.
35 Transferring/Redeeming Stock of A Closely Held Company Often there is insufficient cash and other property to satisfy a division of marital assets when there is a closely-held corporation in the marital estate.When the desired result is the sole ownership of the business by one of the parties, the transfer of stock ownership for cash in a divorce may involve two steps:
36 Transferring/Redeeming Stock of A Closely Held Company Transfer of stock from one spouse to the other incident to the divorce, followed byThe recipient spouse transferring the shares to the corporation in redemption of all the shares received from the soon-to-be ex-spouse.Can be accomplished with the corporation redeeming for an installment note, but special rules may apply so careful planning is required.
37 Transferring/Redeeming Stock of A Closely Held Company Carryover rules related to tax basis and holding period of the transferred shares apply in determining amount and nature of gain on redemption.This can result in a tax trap for the unsuspecting spouse.Structured properly, redemption at capital gain rates to the recipient spouse can be accomplished.
38 Transferring/Redeeming Stock of A Closely Held Company Structured improperly, the spouse retaining the business can be deemed to have received a constructive dividendHistorically taxed at ordinary income rates – currently the same as capital gains (15%) – but this favorable rate expires in a few weeks on December 31, 2010.Future tax rate on dividends is uncertain at this time.Since cash went to the former spouse, spouse retaining the business would receive no cash with which to pay the tax on the constructive dividend.
39 Transferring/Redeeming Stock of A Closely Held Company IRS Reg. § states that if a divorce or separation agreement between spouses or former spouses includes the following, the recipient spouse will be taxable:Both spouses or former spouses intend for the redemption to be treated, for federal income tax purposes, as a redemption distribution to the recipient spouse; and
40 Transferring/Redeeming Stock of A Closely Held Company Such agreement supersedes any other agreement concerning the purchase, sale, redemption, or other disposition of the stock subject to the redemption.However, if the divorce or separation agreement sets forth the following agreements of the parties, the transfer will be treated as a constructive dividend to the spouse retaining the business:
41 Transferring/Redeeming Stock of A Closely Held Company Both spouses or former spouses intend for the redemption to be treated, for federal income tax purposes, as resulting in a constructive dividend to the spouse retaining the business; andSuch agreement supersedes any agreement concerning the purchase, sale, redemption, or other distribution of the stock that is subject to the redemption.So, there is a choice, but you have to draft the agreement properly to reflect your choice.
42 Innocent Spouse & Separate Liability Relief Relief from joint tax liability is available to qualified individuals under three alternatives – IRC §6015Innocent Spouse - IRC §6015(b) and IRS Pub. 971Filed a joint return which has an understatement of tax due to erroneous items of the other spouse.Establish that at the time of signing did not know, or have reason to know, there was an understatement.Considering all the facts and circumstances, it would be unfair to hold the innocent spouse responsible.Ask for all that possibly apply, elect later.1st is traditional 2nd is election to separate liability 3rd is equitable. All require jnt returnAll have a scienter element but, lack of constructive kno
43 Innocent Spouse & Separate Liability Relief Separation of Liability - IRC §6015(c)Filed a joint return.Divorced or legally separated, orNot a member of same household for the past 12 months.Can prove which items of income and deductions attributable to tax understatement are his or hers.Easier burden: only have to prove lack of actual knowledgeEquitable Relief - IRC §6015(f) and Rev. ProcBased on all facts and circumstances, it would be unfair to hold the innocent spouse liable for the understatement or underpayment. Only remedy for underpayment.
44 Innocent Spouse & Separate Liability Relief Understatement: IRC § 6015 (b)(c)(f)Underpayment: IRC § 6015 (f) onlyIRS Pub 971 has flowcharts for steering you to the right IRC SectionRemember if sep returns filed in com prop states, IRC 66
45 Innocent Spouse & Separate Liability Relief Factors considered for relief by the IRS and Courts (Rev. Proc , Sec. 4.03)Knowledge (trumps all equities).Economic hardship.Significant benefits to the person seeking innocent spouse relief.Later compliance with Federal tax laws.Knowledge eg., Even tho W was destitute with a disable child, decree split the IRS obligation, she knew H w/ not pay ½, signed jnt return, no equ relief, knowledge trumpted all other eq’s
46 Innocent Spouse & Separate Liability Relief Tax liability attributable to non-requesting spouse.Non-requesting spouse responsibility for the tax pursuant to the divorce decree.Current marital status.Spousal abuse.Innocent spouse characteristics: education, sophistication, participation, reliance.#2 IRS not bound but it’s a factor. Raises strategic Q, resolve Isp w/ IRS b4 divorce. I advocate IS doing that where possible b/c of divorce J’s tendency to split IRS obligation. Stronger pos’n to come into div ct arguing for disproportionate division showing that IS has settled w/ IRS for 10% of the IRS obligation. Compare your chances of settling with IRS and spouse who’s a tax cheat.
47 Innocent Spouse & Separate Liability Relief Burden of proof for relief is on the taxpayer - IRC §6015(c)(2) and Shafman v. United States 267 B.R. 709 (2001).Joint tax returns signed under duress are not joint returns – Reg. § (d).IRS tax form for requesting relief under any of the three provisions – Form 8857.Tacit consent for signing. Implied consent depends on state of mind of signer and consenter. My position is H c/b signing with implicit consent as long as he’s complying with law but once he starts secretly committing tax fraud or misleading the IS about whether taxes are paid tacit consent ends.IRS sends IS’s Form 8857 to the other spouse or ex-spouse and he is entitled to respond to the IRS about whether she knew or sh have known. Tactical Q: depose him in the divorce case before showing all your cards in the IRS will want to see his depos so prepare for those.
48 Innocent Spouse Deadline 2-years from IRS’s initial collection activity to request Innocent Spouse relief for Sec (b) and (c).Conflict among Circuits whether 2-year deadline for Sec. 6015(f). Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010), Hall v. Commissioner, 135 T.C. No. 19 (2010)No later than 6 months before the expiration of the period of limitations on assessment.#2: 70 something cases B4 tax court on this I. IRS has designated all these for litigation. IRS is asking folks who it denies relief for this R to abate their cases. Usually some years are possibly barred and some not, so I’m not abating any if there’s a chance of settling them all.
49 Innocent Spouse: Traps and Tips, TIMING Requesting innocent spouse relief tolls the collection statute of limitations. Delay requesting in inactive collection cases where the IRS has made no effort to collect from the innocent spouse.If close to 2-year or 6-month deadlines, file a protective Form 8857 with a disclaimer that it’s based on incomplete data, assumptions and subject to amendment.Can’t file 8857 B4 IRS initiates collection. But it’s tactically smart to wait as long as you safely can to avoid tolling the IRS’ ltns.#2 frequent for culpable spouses to have all the tax records & to have concealed Irs notices.
50 Innocent Spouse Timing Assess timing requirements immediately because of strict 2-year filing deadline and 12 month separation requirements of IRC 6615 and 66.Client may need to accelerate separation or wait until anniversary of separation to file Form 8857 to qualify.Obtain innocent spouse relief before entering into non-TEFRA closing agreements or submitting offers in compromise. Regs. § (c)(1).Document your timing warnings to clients b/c tax clients almost universally are procrastinators.Election to separate liability requires 12 month separation. One of my criticisms of the statute. Gov has no biz interferingOne other timing I: Pending bankruptcy: file divorce, accelerates IRS collection.
51 Litigation Tax General Rule #1: Origin of Claim Determines Taxability Origin of Claim: Tax treatment depends on origin of transaction or event giving rise to the item. What does the claim substitute?E.g., Recovery for lost profits are ordinary income; for damage to capital: adjust basisSignificance: IRS considers character & allocation of items in judgments & settlements.Or what does the aty fee or litig cost relate to? Taxable item, exempt, capital asset?
52 General Tax Law Rules No tax deduction unless authorized in IRC: Ordinary & necessary business expense.Collection or maintenance of income.Miscellaneous expenses, subject to 2% of AGI haircut and for AMT.
53 General Tax Law Rules Tax advice. Significance: consider alternatives of characterizing, e.g., alimony.No current deduction if there is a pending right of reimbursement.Significance: Contingent fee attorneys cannot deduct reimbursable expenses until conclusion of case.#2 Paying the spouses’ ats fees in a divorce is personal, non-deductible; Splitting property non-deductible. But if otherwise qualify as alimony, DEDUCTIBLE.
54 General Tax Law Rules #2: Can’t Avoid Tax By Assigning Income Cannot assign income to reduce taxable income:Significance: Unless statutory exception (e.g. employment discrimination) plaintiffs must include contingent fees in income.Individuals’ deductions for fees subject to AMT and 2% of AGI haircut.Avoid assigning interest in contingent fee (double tax).When clients ask, what are the taxes on this litigation recovery? You have to include 100%, even my share, in your income and the deductions depend on your individual tax circumstances: what’s your AGI for that year, what’s AMT that year, what’s the recovery for under Origin of claim?"the fruit of the tree" theory, thatincome is taxable to the person who earns it and it cannot be assigned to someone else.LEGAL FEES RELATING TO NON-TAXABLE AWARDS ORSETTLEMENTSNo legal fee deduction will be allowed for legal fees allocable to non-taxable awards orsettlements. IRC section 265(a). Absent strong support to the contrary, legal fees relating to anaward or settlement that is partially taxable will be allocated based on the ratio between thetaxable award/settlement and the total award/settlement.See Johnson-Waters, T.C. Memo ; and Church, 80 T.C. 1104, 1110 (1983).
55 General Tax Law Rule #3: Tax matters in drafting settlements/judgments If judgment or settlement agreement does not address tax treatment or reasonably allocate items with preferred tax treatment, courts will usually not respect later tax arguments.Reasonable tax characterizations and allocations reached by adverse parties in an arms’ length manner, and treated consistently, are generally respected.SO, CHARACTERIZE AND ALLOCATE.Other than strictly tax exempt PI cases but even those it’s a good practice to confirm that in the agmt and that the payor will not be issuing a 1099 to your client , & if an employer, that there will be no tax W/H. Not infrequently, cases have multiple claims with different tax treatments, eg. Lost profits taxed at ordinary income rates and damage to capital investments taxed at capital gain rates, address & allocate to minimize ordinary income tax rate.
56 Qualified Settlement Agreements, IRC Sec 468 Defendants get immediate deduction.Plaintiffs get time to work out remaining issues, e.g. allocations, liens.Income earned on QSF funds can be tax-free to Plaintiffs.Plaintiffs must avoid “constructive receipt.”3 Requirements: court order, “claim,” “trust.”If litigants can’t agree on tax language, use tax language in QSF’s release.Gene MayoDon’t try to do these yourself.
57 Preserving Deductibility of Clients’ Fees Characterize and itemize deductible items in billsBusiness expenses > personal.Collection or production of income.Determination and collection (but not defending) alimony.Segregate fees for Exempt PI vs. Taxable, Capital vs. Ordinary, Recovery of Basis.Tax Advice.If multiple clients, ID client for whom svcs are rendered.S/b used to segregating on your timesheets among claims that do and do not allow recovery of fees, e.g., b/k vs. tort. Same req’t for allocating among fees relating to claims w/ diff tax treatment.What you don’t say will be used against you.
58 Preserving Clients’ Deductions May be possible to settle non-deductible Fines and Penalties as deductible restitution.- Is statute “remedial” rather than punitive?Only payer gets deduction. Payer must pay for its own benefit.1099sNot unusual for biz’s to settle claims for fines & penalties with gov’t entitiesWhat’s purpose of statute?1099 LATE ADDED SLIDE reporting obligations most contentious, most folks believe lame duck Congress will change this but meanwhile, get your payees’ tax ID info & address b4 they get your check and vanish into the wind to preserve your deduction
59 Malpractice / Grievance Prevention Engagement letters: ID clients, scope, scope limitations, allocation of responsibility among advisers, fee obligations. Issue “declined case” and termination of representation letters.Since many clients won’t take advice to “consult your tax adviser,” assist them in obtaining timely, competent tax advice.Don’t get in too deep – don’t sue clients.Engagement letter s/b a primary tool in any malpractice defense.If you haven’t allocated responsibility among different advisers, you’re at risk of sharing risk.Alan & I have both been involved in CPA & Aty malp claims & how many involved clients who extended their clients way too much credit for svcs rendered and thot they had as much a right to sue their clients as regular citizens. I didn’t see many of those malpractice counterclaims come out the way the aty hoped. Expect to spend 2-3 times as much nonbillable time helping your defense aty as you wasted on that deadbeat client. You could have been on the slopes or at the beach.
60 Pre-Trial Tax Checklist Clients current on tax filings.Expert prepared to address Rem. C (net tax) and to argue against double tax.Can anyone add to my list?Anyone figured out this new statute yet? No one has raised it yet in any of my cases other than in depos I think for fear of it running up the dmgs on D side or inflicting a double tax on the P side. Assume it has to be raised at T but that I is B4 SC last I saw.
61 Physical Injury-Illness Claims Are Tax Exempt, IRC 104 Injury must be visible or sexual abuse.Emotional injury requires physical injury.Spousal consortium & lost earnings exempt if from PI.Statutory recoveries, e.g., workers comp.Exceptions: punitives, no “claim,” interest, virtually all non-PI employment claims, union contract payment, severance, disability.Lost earning is notable exception to Origin of Claim rule.Includes statutory recoveries such as comp, not JUST statutory.Claim req’t: satisfied by an aty letter addressing a widow’s H’s on the job death. Dint have to file.For nonphysical injuries, under the current version of IRC section 104(a)(2),only out-of-pocket amounts for medical costs incurred to treat any emotional distress claimswould be excludable from income.
62 Defendants’ Tax Withholding Obligations Payroll TaxPayments to Resident AliensReal Estate Sales To AliensExcise TaxIRS can collect against individual Responsible Persons, who participated in decision.- non-dischargeableDs: Be aware of these or you may end up paying twice Taxable in the year paid.TFPR claims against RP indiviiduals are the most serious IRS problems other than criminal.IRS can come after outside advisors who participate in decisions on whom to pay other than the gov’t. Wages are broadly defined as any form of remuneration for personal services. IRS looks closely for WH’g obligations b/c of lack of adversity betw pts on the Issue. Both benefit from non-wage characterization so IRS has to look out for itself. the label placed on settlement payments by the plaintiff and the defendant does notnecessarily control the employment tax treatment of such payments. settlement agreement allocating payments to non-wage payments is generally not based on an arm’s length negotiation between adverse parties. An allocation of the settlement that is reasonable and based on the facts and circumstances of thecase should generally be accepted by the Service. A statement by the employer that thesettlement payment was made merely to settle the case is of little value in determining whetherthe payment is wages for employment tax purposes. Generally, if no specific allocation of thesettlement is made, the status of the payments would be determined by looking at the claimsasserted by the plaintiff and the surrounding facts and circumstances, including the basis uponwhich the settlement proceeds were distributed. There has been a considerable amount ofLitigation - back pay iswages even though it is attributable to a period during which actual services were not performed or not hired. Recovery is a substitute for the wages under origin of claim. Some mixed authority on front pay but IRS treats it as taxable.dismissal pay, severance pay, or other payments for involuntary termination taxableBenefits (SVC position 2001, taxable no exception but see Wood)
63 1099s Currently, any payment > $600K. Need payees’ tax ID#s, IRS name, address.Co-counsel, Plaintiffs, Plaintiffs’ ats, Aty PCs, Non-corp vendors, independent contractors.Exceptions: payments to clients, non-attorney corporations.Middleman Regs if attorney exercises significant control & oversight of funds.
64 Conclusion Multiple claims may have different tax treatment. Document tax preferred items.Allocate.“Reverse Miranda”: What you don’t say about tax, will be used against you.Attorneys (like all self-employed) are IRS targets.#2 in your pleadings, settlement communications and agmts, JsReasonable allocations.IRS has a special mkt segment specialization program for auditing lawsuit awards and settlement. Payors and payees.industry classification for auditing attorneys.IRS follows bluesheets and courthouse filings.