1099 for retainer paid to an attorney

[markm96160]

Our company paid a $5,000 retainer to an attorney in 2019. We issued a 1099 reporting $5,000 in box 7. The attorney received the 1099 and asked us to issue a corrected 1099 showing $0 in box 7 because the $5,000 retainer is going to be refunded, but not until 2020. Is a corrected 1099 for 2019 appropriate? How should this be reported correctly?

Thanks!

[TomK100]

Payments to attorneys. The term “attorney” includes a law firm or other provider of legal services. Attorneys' fees of $600 or more paid in the course of your trade or business are reportable in box 7 of Form 1099-MISC, under section 6041A(a)(1). 

In short, a retainer is a liability that must either be repaid or earned. ... In other words – from a tax perspective – there's a good chance the law firm must pay taxes on the client retainer when they receive payment.

I would leave the 1099 as is; you have not received a refund yet (and definitely not in 2019)

[verteve6lh]

Thanks Tom, I appreciate the quick response! That confirms my suspicion of not changing the 2019 1099. Now for 2020, there are 2 scenarios:

Scenario 1: If the $5,000 retainer is refunded in 2020, is there anything that needs to be reported?

Scenario 2: The $5,000 is refunded in 2020, but the attorney also bills us $2,000 for services performed (for the same case the $5,000 retainer was meant for) and we pay in 2020. Would we report $2,000 in 1099 box 7 in 2020, even though we already reported the retainer in 2019?

[RobertG]

Scenario 1: If you deducted the $5,000 in 2019 you would have to report it as income in 2020, and issue no 1099.

Scenario 2: If you deducted the $5,000 in 2019 you would have to report it as income in 2020, then take a deduction for $2,000, and issue a 1099 for $2,000.

[rstarr813]

Scenario 2 is possibly incorrect.  In your scenario, you claim you have paid a retainer in 2019, then the attorney incurs work for only $2,000 in 2020...typically, this goes against your retainer.

So...if you expensed the $5,000 retainer is "legal and professional fees" in 2019 and Sent the 1099 for 5k...in 2020, you will get a bill for $2,000...but you likely would never pay it....on your end...this would go against the account payable for the attorney, which would have a negative beginning balance of $5k....as it is a pre-payment....the attorney still owes you a 3K refund...OR 3K in future work.

If you did not actually write another check in 2020 for the 2K...you do NOT issue another 1099 in 2020.

However, if you did in fact get the 5K refunded to you...you would book that as debit to cash, credit to the same g/l account you used when you paid it out.  Next, your 2K payment, should be Legal Expense debit, credit to cash and yes...in this case you would issue another 1099 in 2020

[JoeSoCal]

I have a similar situation. We paid $3250 for a retainer in 2022, and only when the consultant received the 1099 did they claim that $500 was earned services and the remaining $2750 needed to be returned (one year later). We issued a 1099 based on the full retainer paid, and the consultant said they "forgot" to mail the unearned $2750 (last year). To date, the refund has not been received. If it does show up in the next few days, one year later, do I void the 1099, as the net payout will be reduced to $500? Advice, please, and thank you! Can't the attorney claim an adjustment on his 2022 tax return for the refunded difference if we truly end up receiving that refund of the retainer?