I agreed to a settlement in a legal dispute. The party who paid the settlement issued a 1099-C / Miscellaneous income form, sending a copy to the IRS. I was under the impression that legal settlements, especially those that are not a direct payment for loss of income, were not taxable. Are such settlements taxable? If not, what is the proper method for disputing this?
A 1099-C and a 1099-Misc are totally different. The other party is required to issue a 1099-misc (if you received money) if the settlement amount is over $600 dollars. They are also required to send that form to the IRS.
With settlements, it depends what the underlying settlement was for. If it was related to personal injury, the whole amount may be excluded from tax even if it was reported. If it was an employment suit settlement, then the amount is typically included in tax, unless there is a personal injury component, in which case I suggest you talk to a tax attorney. I have represented many clients in disputes with the IRS over settlements. The underlying facts of the situation will be what determines the taxability of the settlement.
Settlement/awards are taxable, unless excluded by the IRC 104(a)(2). Generally, recovery of your own asset, payment for personal injury, medical expenses, and pain and suffering may be tax free. Review the settlement agreement with you lawyer. The information presented herein is for general purposes only. It is not intended to, and may not be construed as legal, tax or accounting advice. For specific advice, please consult a local counsel. Good luck. Zaher Fallahi, Tax Attorney, CPA.
The form 1099 -C being issued does not mean you cannot dispute the amount of income alleged forgiven.
Often, someone settles a complaint and does not agree that any amount was due and owing.
Whether you owed the person more than what you paid is a factual issue.
You should meet with a tax attorney to obtain their opinion.
If you do dispute the amount of alleged income, your return should contain a notice of inconsistent position.
All income, even from a settlement of a lawsuit, is presumptively included in gross income for federal income tax purposes. You did not state what kind of settlement you have. For example if it is a pure personal injury settlement for damages such as a broken arm, that might be excluded. Items that would be included might include a discrimination claim, punitive damages, or a settlement for nonpersonal injuries.
You may want to review this with a good tax lawyer.
I hope this helps!
If you do not like this answer or disagree, please look at one of the other answers provided. It is not necessary for you to try prove this answer is "wrong" or something with which you do not agree. This is a free service for you based on limited facts. Nevertheless, many times you need to consult an attorney with the details to get actual advice specific to your concerns. Do not put too many details in your questions or comments because this makes the information public and could hurt you. Government Regulations contained in IRS Circular 230 regulate written communications about Federal tax matters, including e-mail, between us and our clients. This is another attempt by the government to limit your rights and to extend the control of government over individuals and businesses. Nevertheless, such communications are either opinions or other written communications. This is not an opinion. It is other written communication and was not written to be relied upon, by itself, to avoid any tax penalties. In order to receive assurances of protection from tax penalties from a written communication, you should get an opinion letter. If you would like to discuss an opinion letter relating to any matter, please contact me and I will explain what is involved and what it will cost.
Our Rating is calculated using information the lawyer has included on their profile in addition to the information we collect from state bar associations and other organizations that license legal professionals. Attorneys who claim their profiles and provide Avvo with more information tend to have a higher rating than those who do not.What determines Avvo Rating?Experience & background
Years licensed, work experience, educationLegal community recognition
Peer endorsements, associations, awardsLegal thought leadership
Publications, speaking engagementsDiscipline