The name of a tax law introduced in the Senate says it all: the law to end double taxation of successful consumer claims. Should plaintiffs in consumer lawsuits pay taxes on money paid direct to attorneys – fees plaintiffs are not allowed to withhold? It sounds like a stupid question and most people would say no. In a 2020 poll of 1,000 likely voters, 81% of Republicans and 83% of Democrats were in favor of changing the tax system so that people who win cases against companies are not taxed on reimbursed legal fees that go to their attorneys. However, the seemingly insane tax problem of plaintiffs being taxed on money they never see is real. Of course, the attorneys pay tax on the fees, but the treatment of the plaintiffs is the problem. Many consumer fraud cases involve punitive damages for bad business conduct. In general, tax law treats attorney-related fees as paid to the client first and then to the attorney, even if the payments are made directly to the attorney.
A law book with a hammer – consumer protection
However, in consumer cases, many charges are made under special laws that hold the defendants responsible for the charges, and these charges arguably should not be treated as income for the plaintiffs at all. The strange tax treatment of legal fees appears in other contexts, but the tax problems are particularly unfair in consumer cases. Consumer protection laws are intended to create incentives for consumers to take action and to help promote the safety, quality and fairness of the market. When unfair taxes discourage people making consumer protection claims, it harms plaintiffs and the market as a whole.
Plaintiffs can be charged with fee income, and that means looking for tax deductions. As of 2018, however, legal fee deductions were severely restricted by President Trump’s massive tax cut law. In addition, some companies have begun issuing IRS Form 1099 to plaintiffs, even for legal attorney fees. In short, consumer claimants need a break.
Fortunately, Senator Catherine Cortez Masto (D-Nev.) Introduced the Act to End Double Taxation on Successful Consumer Claims. It would change tax laws so that individuals who win consumer cases are no longer expected to pay taxes on reimbursed legal fees paid to lawyers. A similar law has been part of the Tax Code since 2004, which allows plaintiffs in discrimination claims to deduct their legal fees. This 2004 law also covers civil rights and whistleblower claims, but the application of existing deductions to consumer rights cases is not 100% clear.
As a result, the National Association of Consumer Advocates (NACA) has been asking for help to consumers for some time. Ira Rheingold, Executive Director of NACA, said: “Sen. Cortez Masto recognizes that in our current tax system there is an obstacle to justice for unjustified consumers seeking compensation for their damages. We are pleased that she is taking action to correct this. “The End Double Taxation of Successful Consumer Claims Act would provide plaintiffs making meritorious consumer claims the same reasonable tax treatment as work claim claimants (fully tax-deductible attorney fees). Hopefully Congress will pass it soon.