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A 'Taxing' Way to Get Back at Deadbeat Clients

By Deanne Katz, Esq. | Last updated on

Most clients, like most lawyers, are good people, so in your career you hopefully won't have many issues with clients not paying. The few times it does happen are quite enough.

Those fees are, of course, how you make your living, which means you need to find a way to get "deadbeat" clients to pay up. Even if you're lucky enough that you can let the fee go and not feel the pinch on your wallet, it still hurts your pride to let someone cheat you and walk away.

We've talked before about reasonable ways to recoup your unpaid fees. But we recently came across one method that's a bit more drastic.

Before you try what consultant Ellen Freedman suggests on her PA Law Practice Management blog, you'll probably want to go through all the "traditional" methods for collecting an unpaid fee first. That means sending the client a letter asking him to pay, perhaps calling him about the fee, and following up a few times. You can also file a lawsuit to force him to pay.

But if all those attempts fail and you still don't have your money, there's one last unsual attempt you can make.

You can forgive the debt, and then file a 1099-C form with the IRS for the amount of the forgiven debt, Freedman explains.

Actually the first step is to inform the client that you plan to file the 1099-C and that the amount of the fee will then have to be declared as taxable income on the deadbeat client's tax return. You must then send a 1099-C form to the client by the end of January.

A 1099-C will increase your client's tax burden since the amount of the debt won't be pre-taxed. It could make the client's tax filing more complicated as well -- something that makes most people panic.

There's also the chance that the client won't be able to file estimated taxes in time and will have to pay a penalty.

Hopefully letting clients know that you plan to file with the IRS if they don't pay their debt will get them to contact you about paying their bills. But if not, going ahead and filing the form can provide some benefits for you too.

First, there's a little satisfaction in knowing the client isn't getting away scot-free. He may not have paid the bill, but he now feels a little of your pain.

But the bigger benefit is that this will lower your tax burden as a business owner.

When you incur client costs, you generally can't claim those as "losses" for your business since they're supposed to be reimbursed by the client. But if the loss is never repaid, that debt may be deductable.

Timing is important, so check with your accountant before you claim the debt as a tax deduction. Even if you don't get the full fee, at least you'll get something out of the deal.

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