Practice Management

A Quick Return to Sweet, Sweet Revenge

After dispensing advice for 10 years about how to gain psychological relief by exacting revenge on deadbeat clients, I retracted it as of yesterday. After some additional research, I can again offer up the same advice with a better explanation. If you have not read yesterday’s post entitled “Revenge Is Now a Lot Less Sweet” you may want to divert your attention to do so for a moment, so that today’s post on the same topic makes sense.

I am grateful to Chicago attorney Donna Hartl for being true to her word and following up on the subject with her ABA online taxation attorney discussion group. Donna informs me that the debate was long and heated on both sides as to whether a firm could file a form 1099-C (Cancellation of Indebtedness) on a voluntary basis, even though a law firm is not one of the types of entities narrowly defined as having a requirement to do so. Required entities include governmental agencies, financial institutions, and some others.

Ultimately an “Arizona gentleman” provided a copy of an IRS Significant Service Center Advice #1998-020 which deals specifically with whether an entity not required to file a 1099-C may do so voluntarily.

FACTS
The taxpayers are private businesses that extend credit to their customers. However, these businesses are not financial institutions. Occasionally, some of the customers will default on their credit obligations. Normally the creditor will write off the debt when it becomes uncollectible, and may issue a Form 1099-C to the defaulting customer.

DISCUSSION
While the requirement to report discharges of indebtedness applies only to the entities described above, there is no specific prohibition in the Internal Revenue Code or the Income Tax Regulations that forbids the reporting of discharges of indebtedness by entities not required to report. Such reporting may encourage voluntary tax compliance and proper gross income inclusions.

CONCLUSION
Individuals or entities not required by section 6050P to file Form 1099-C may nevertheless voluntarily file such forms in appropriate circumstances.

So there you have it folks. Unless something changes again, in which case I’m hoping we’ll hear further from our friendly and vigilant Chicago attorney, you can hang your hat on this, since there’s nothing to the contrary. When you’ve done everything right from intake through final billing and follow-up, and your client still does not pay . . . when you’ve given the client every opportunity to voice any complaints regarding the representation . . . when you’ve had an independent review of the file and concluded that you’re not about to sue for any number of valid reasons . . . and after the statute of limitations on filing a malpractice claim has passed . . . then and only then can you exact your revenge.

After the benchmarks above have been passed, wait until some time in late October to mid November to send a letter to the client. Tell them that if payment is not forthcoming within the next ten days you will have no alternative other than to write off the debt, and issue a 1099-C to them for the full amount of debt forgiven, including fees and costs. That will then give them reportable income hopefully too late in the year to make an anticipated tax payment, or offset it with additional expenses. In other words, you’re going to, at the least, throw a monkey wrench into their year-end tax planning.

Some people get so crazy about any potential red flag the IRS may use to trigger an audit, that they immediately pay to avoid the 1099-C. But most attorneys who get to this point don’t even care about the money any more — the revenge alone is sweet enough. Now you can do it without worrying when your accountant is not aware of the strategy. Hey, if the cream of the crop taxation attorneys in the U.S. had to debate it for hours until the answer was located, it’s no wonder so many non-tax attorneys and their CPAs have salivated at the idea, but refrained out of fear. Fear no more. Exact your revenge.

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Full post as published by Law Practice Management on November 14, 2008 (boomark / email).