Letter 6638 is an educational letter. The IRS received your Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B). The return shows the fund made payments, but the required information returns weren't filed.
No response is required. But don't ignore what the letter is pointing to.
The Reporting Rule
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 requirements are in Internal Revenue Code section 6045 and Treasury Regulation section 1.6045-5.
Whether you must report depends on factors such as:
- Whether the settlement payment is taxable.
- Who received the payment.
- Whether the payment went directly to the claimant, to an attorney, or jointly to both.
Payments to Attorneys
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 fees. Request the attorney's taxpayer identification number (TIN) before or when you make the payment. If the attorney doesn't provide a required TIN, backup withholding rules may apply.
Payments to Claimants
Whether a claimant gets a Form 1099 depends on several factors, including whether the settlement is taxable and how the payment is made.
What to Do
- Review the payments the fund made and identify which ones required information returns.
- File any missing Forms 1099 and furnish copies to the recipients.
- If you must file 10 or more information returns, you generally must file them electronically. The IRS's free Information Returns Intake System (IRIS) is one option.
The IRS may assess a penalty for each required Form 1099 that isn't filed or furnished. Penalty amounts vary and change over time. Fixing the gap now beats waiting for a penalty notice.
If your settlement fund received Letter 6638 and you're facing information return penalties, call us at (813) 229-7100.