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As a result of the City’s failure to issue tax forms to attorneys for certain settlement payments, an IRS audit sought over $3 million from the City, but is now resolving the issue with a $116,416 payment.

The Internal Revenue Service’s audit focused on the City’s settlement payments for years 2017 to 2019.

According to Interim City Attorney George Cardona, the vast majority of claims were for personal injury and therefore not taxable to the plaintiff. However, it was often the City’s practice to issue joint payment to plaintiffs and their attorneys, which requires the issuing of form 1099 to attorneys for their tax filings. The city generally did not issue this form.

As a result, the IRS audit sought to charge the City for the missing taxes from attorney settlements.

“The IRS initially sought to impose backup withholding taxes penalties and interest on all of the City’s settlement payments from 2017 to 2019, a total amount conservatively estimated to be in excess of $3 million,” said Interim City Attorney George Cardona in a July 27 City Council meeting.

However, just because the City failed to issue the forms, does not mean that all attorneys failed to pay taxes due on the settlement fees they received from the City.

According to Cardona, the City corrected its procedures and underwent an evidence gathering process that demonstrated the “overwhelming majority” of attorneys did pay their taxes. This information was presented to the IRS to correct the fee the City was liable to pay.

“The IRS has offered to resolve the audit with a proposed assessment to the City of $116,468, relating to 11 particular settlements,” said Cardona, recommending that Council approve the settlement, which members did unanimously.

Clara@smdp.com