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Understanding your Letter 6638

 

This educational letter informs you that we received your Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B), showing you made payments but didn't file the required information returns. No response is required.

What you need to know

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 reporting requirements depend on factors such as:

  • Whether the settlement payment is taxable. 
  • Who received the payment. 
  • Whether the payment was made directly to the claimant, to an attorney, or jointly to both. 

The reporting requirements are found in Internal Revenue Code Section 6045 and Treasury Regulation Section 1.6045-5.

Where to find more information

Frequently asked questions

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 legal fees. The specific reporting requirements depend on the facts of the payment.

Whether you must issue Form 1099 to a claimant depends on several factors, including whether the settlement is taxable and how the payment is made. Review the reporting examples above and Treasury Regulation Section 1.6045-5 for additional guidance.

If you're required to report payments to an attorney, you should request the attorney's TIN before or when you make the payment. If the attorney doesn't provide a required TIN, backup withholding rules may apply.

The IRS may assess a penalty for each required Form 1099 that isn't filed or furnished. Penalty amounts vary and may change over time.

Generally, if you're required to file 10 or more information returns for tax year 2022 and later, you must file them electronically. You can use the free Information Returns Intake System (IRIS).