VALID › Notice Library › Letter 6638
In the IRS’s own words · not reviewed by VALID
6638 letter explained, in the IRS’s own words
If you make payments from a qualified settlement fund, you may have to report those payments to the IRS and provide information returns to the people who received them.
Read the full 6638 page on irs.gov ↗
What you need to know
If you make payments from a qualified settlement fund, you may have to report those payments to the IRS and provide information returns to the people who received them.
The reporting requirements depend on factors such as:
- Whether the settlement payment is taxable.
- Who received the payment.
- Whether the payment was made directly to the claimant, to an attorney, or jointly to both.
The reporting requirements are found in Internal Revenue Code Section 6045 and Treasury Regulation Section 1.6045-5.
Where to find more information
- Instructions for Forms 1099-MISC and 1099-NEC
- Publication 1220, Specifications for Electronic Filing of Information Returns PDF
- Publication 4345, Settlements – Taxability PDF
- Publication 5717, IRIS Taxpayer Portal User Guide PDF
- Information Returns Intake System (IRIS)
When do I have to issue Form 1099 to an attorney?
Generally, if you make a payment to an attorney in connection with legal services, you must issue the required information return even if the attorney keeps part of the payment as legal fees. The specific reporting requirements depend on the facts of the payment.
When do I have to issue Form 1099 to a claimant?
Whether you must issue Form 1099 to a claimant depends on several factors, including whether the settlement is taxable and how the payment is made. Review the reporting examples above and Treasury Regulation Section 1.6045-5 for additional guidance.
What is a taxpayer identification number (TIN), and when do I need it?
If you're required to report payments to an attorney, you should request the attorney's TIN before or when you make the payment. If the attorney doesn't provide a required TIN, backup withholding rules may apply.
What happens if I don't file required Forms 1099?
The IRS may assess a penalty for each required Form 1099 that isn't filed or furnished. Penalty amounts vary and may change over time.
Do I have to file Forms 1099 electronically?
Generally, if you're required to file 10 or more information returns for tax year 2022 and later, you must file them electronically. You can use the free Information Returns Intake System (IRIS).
What to do next
- Write down the date on the letter today.
- Look the number up on irs.gov yourself. Don’t trust a link or phone number from anyone else.
- If it says you owe money or proposes changes to your return, take it to a licensed CPA, EA or tax attorney before that date.
Not advice. Not a filing. Verify with a licensed professional. Rules change by year and facts.