Taxes on Personal Injury Contingent Fees: New IRS Scrutiny of Inconsistent Offshore Income Deferral Plans

Description

Attorneys have long used settlement annuities both to distribute settlement proceeds to the plaintiffs and to defer receipt of contingent attorney's fees, a practice approved in Childs v. Commissioner, 103 T.C. 634 (1994) if the deferral is properly structured. Over time, a variety of fee deferral solutions spun off from the Childs ruling, including offshore assignment companies, like Liberty Mutual and BARCO, and quasi-deferred compensation plans, to provide alternative solutions to structured settlement annuities, and attorneys flocked to them.

Recently, the IRS has taken the position that these alternative products are subject to further examination and scrutiny on a case-by-case basis to determine if these non-traditional solutions used to defer contingent fee income meet their intended tax obligations and abide by constructive receipt and economic benefit rules.

Counsel needs to understand how to use qualified and non-qualified assignments to defer the plaintiff's settlement and their contingent fees, the role of the assignment company in the deferral process, the risk of forfeiture as a creditor or payee, how periodic payments can be structured to align with financial planning goals, and the tax implications and legal considerations for each deferral strategy, as well as alternative income deferral options using traditional IRS approved qualified plans (i.e. 401(k), cash balance plan, deferred compensation, etc… .).

Listen as our panel of experts offers insights and strategies to address critical risks that attorneys face when structuring fees, including IRS scrutiny and potential unintended risks or tax liabilities.