The Internal Revenue Service (IRS) is notorious for showing up whenever money changes hands — selling your business? Do not forget to pay a portion to Uncle Sam. Are you getting divorced? If you do not follow the rules, the IRS could take a cut of your assets. Are you going through a lawsuit?
Wait. What? Surely the IRS does not come after those who were seriously injured or wronged? Unfortunately, in some cases, the answer may be yes.
Those who settle or win a lawsuit may find themselves opening a Form 1099 in the mail during tax season. The IRS uses this form to keep track of the taxpayer’s income and, in some cases, the agency will consider lawsuit winnings a type of income.
Is no one safe?
There are some exceptions. In most cases, the IRS will not tax awards for victims who suffer a physical injury. However, the IRS may expect a tax payment on punitive damages that come with an award in these cases. Punitive damages are those awarded to the victim as a means of financial punishment for the offender. The IRS may also tax damages given in these cases solely for emotional distress.
What cases does the IRS tax?
As noted in a recent piece in Forbes, the IRS will review the “origin of the claim” to determine if the lawsuit results in a tax obligation. If it does, this origin will also help the IRS determine the type of tax. Those seeking lost wages, for example, will likely have a settlement or award taxed as wages.
There are many nuances to the taxation of settlements and awards. Determining the right course of action to meet your tax obligation but not pay more than needed is complex. As a result, it is often wise for those who are navigating a lawsuit to seek legal counsel. The attorneys with Goldburd McCone are experienced with these matters and can help to better ensure your interests are protected.