IRS wants self-employment tax on 1099-misc box3?
Posted on the wrong category.. so reposting...
There was a damage to our property (actual repair costs well over $125k). We hired an attorney and sued for the repair cost/damage to property.
we settled out of court for $100k. the settlement fund was deposited to an IOLTA account for the benefit of me.
My lawyer took the balance of my fees (lots of hours stacked up towards the end that I hadn't paid yet) from the settlement and forwarded the settlement balance to me ~$80k
come tax time, MY lawyer sent me a 1099-MISC with the amount of the balance of the settlement fee. First he put it in Box 7 "non-employee compensation". When I pointed out that the settlement is not wages, he sent me a 1099-MISC correction with the same amount in Box 3.
We filed the taxes, and deducted the 1099-MISC Box3 amount in Line 21 - settlement amount for property damage repair suit-non taxable income (it goes against our cost basis)
then we get a letter from the IRS saying that we owe them about $2k in self employment taxes and interest. I send them the copy of the settlement, the claim, the 1099-MISC corrected showing amount in Box 3, also explaining that my lawyer didn't hire me, but I hired him, and he's an independent contractor so I shouldn't owe any SE tax.
but then they rejected saying our information was not sufficient. and I need a corrected income statement from my lawyer. When I called my lawyer, he found out that although he sent me the 1099-MISC correction, he never actually filed the correction with the IRS (he said he thought his software did, but he couldn't find any record of such filing of the correction)
So, if he files the correction to the 1099-MISC, and i get a copy and a statement that he filed the correction, and then send that to the IRS, will this go away?
or is there something else I need to worry about? (like, I don't understand how IRS came up with $2k in taxes.. it doesn't seem to be based on $80k box 7 that was on the original 1099-MISC)