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What are the tax implications of restitution?

New York, NY |

Approximately $300,000 was stolen from me. This snowballed into a much bigger loss of literally millions as it caused me to lose my home, car and business. The DA chose to only pursue a portion of the theft and they made a deal with the embezzler to avoid trial. I am receiving $20,000 in restitution over two years. Along with the first check the felon's lawyer wrote to me that he would be personally informing the IRS of the restitution and sending in something (1099?). Please let me know what the real story is here. Does the IRS care what he sends them? Am I liable for taxes on this money? If so under what category? Income? My business was an LLC/sole proprietorship so my taxes have always been a 1040 with a Schedule C. Thank you.

Attorney Answers 4


  1. I suggest you speak with a tax lawyer. Generally, assuming the money you lost was after tax dollars I don't see why the restitution would be taxable. I would also call the DA's Office to tell them the defendant is planning to send you a 1099; they may be interested in knowking that the defendant is going to try and claim a business deduction for restitution of money he stole.

    I am a former federal and State prosecutor and now handle criminal defense and personal injury/civil rights cases. Feel free to check out my web site and contact me at (212) 577-9797 or via email at Eric@RothsteinLawNY.com. I was named to the Super Lawyers list as one of the top attorneys in New York for 2012. No more than 5 percent of the lawyers in the state are selected by Super Lawyers. The above answer is for informational purposes only and not meant as legal advice.


  2. In general any settlement or court award is taxable unless it is for physical injury or physical sickness. You may have been eligible to take a deduction for $300,000 in the year of the theft as a theft loss. Then, you would recover the $20,000 restitution as ordinary income in the year received. You should consult with a CPA or attorney with more details on your case.

    Andrew B. Gordon , Esq., CPA
    Gordon Law Group, Ltd.
    Main: 847.580.1297 | Fax: 847.305.1279
    ABG@GordonLawLtd.com
    www.GordonLawLtd.com

    Andrew B Gordon is a CPA and attorney licensed to practice law in Illinois. The information provided here is for educational purposes only and is not intended as legal advice for a particular matter. This response does not create any attorney-client relationship with the author. For specific advice about your particular situation, please consult an attorney.


  3. Restitution funds are genally after-tax funds and should not be taxable to you when they're returned. And you should not be receiving a 1099 for them. Meet with your tax attorney and consider the options.

    Good luck.

    Evan A. Nielsen
    1255 W. Colton Ave., #506 | Redlands, CA 92374
    Main: 909.363.4658 | Fax: 480.304.3211
    Evan.Nielsen@NLGLaw.com
    www.NielsenLawGroup.net

    Mention this Post for a free consultation.

    Evan A. Nielsen is licensed to practice law in California. The information provided here is for educational purposes only and is not intended as legal advice for a particular matter. This response does not create any attorney-client relationship with the author. For specific advice about your particular situation, please consult an attorney.


  4. This is tricky. If you ever claimed it as a theft loss, you can bet it would be taxable. If not, then it should not be taxable depending on how your CPA wants to handle it. No matter what, you had a theft loss and that is the part of the picture that seems to be missing. Make sure to notify your preparer.

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