My only income, other than the settlement, was non taxable disability for 2011 and I'm now on the verge of receiving SSDi back pay from 2009. I never received anything about the taxability for my settlement and when I contacted my atty he requested the documents from the other side but received no response. He sent me an email saying I should assume it wasnt taxable. I know I'm filing late but I did this waiting to see if i got anything. If I file and find they did indeed report it but I didnt get anything do I have any recourses?
Thank you! I'm not looking to take action against anyone, just to make sure I take care of any tax responsibility. The 1099 was actually supposed to be sent through my atty who, as mentioned above, has requested it by email twice this year and has received no response. the recourses I asked about were more along the lines of penalties if it was reported to the IRS and I have tried to get the information but they havent responded.
If you are asking if you can take action against the other party because you didn't receive a 1099 - the answer is probably not. If the IRS received a copy of the 1099, the other side may take the position that they mailed the 1099 to you - as required. You just didn't receive it.
Generally, settlements for employment are taxable events - settlements are determined to be income unless the settlement is compensation for a physical injury or physical illness. ALL income must be reported on your return, even if you do not receive a 1099.
I hope this helps.
Steven A. Leahy
Please note that the above is not intended as legal advice, it is for educational purposes only. No attorney-client relationship is created or is intended to be created hereby. You should contact a local attorney to discuss and to obtain legal advice.
You must certainly retain qualified tax counsel. The answer to your question about whether the settlement is taxable income depends on a variety of factors all of which must be uncovered. I suggest that you not rely on your attorney's assumption that its not taxable simply because no one responded to his email and you haven't yet received the documents you requested. If your attorney is wrong, you still owe the tax interest and and may owe the penalties if the income turns out to be taxable. The IRS has Publications available at www.irs.gov which may be helpful.
If your attorney told you in writing that the settlement was not taxable income, you have a reasonable basis to take that position on your return. Even if you are wrong, if you are reasonably relying on your lawyer you should have enough to avoid being penalized. However, it is always a risk that the IRS will assert a penalty even if you have written advice from the lawyer. It is extremely difficult under our laws to get a settlement that is anything other than taxable income. In any event, this is a return that you should not prepare yourself; you should hire a competent CPA. If the CPA feels comfortable taking the position that the settlement proceeds are not taxable income, then you are really in good shape.
Determining the "flavor" of income from a settlement is a legal analysis based on the basis of the claims in the complaint and the terms of the settlement. For example, the portion for lost wages, will be taxes as wages would be. But this is a tricky analysis, and you shouldn't assume anything. If it is 100% compensation for physical injury or loss of physical capacity, it can be excluded. But you would be surprised how many people think lost wages can be excluded because the absence from work stems from a physical injury. My point is that people tend to see what they want to see when they are determining whether income is taxable or not.