You should approach a tax specialist. Depending on your circumstances you may have a number of options. On the slim facts you provided, you are unlikely to get an answer that maximizes your options.
READ THIS BEFORE CALLING OR EMAILING ME: I am licensed in the Commonwealth of Virginia, addressing your issue does not create an attorney-client relationship and I AM NOT providing you legal advice. You should speak with an attorney to whom you have provided all the facts, before you take steps that may impact your legal rights. I am not obligated to answer subsequent emails or phone calls unless you have hired me. I wish you the best of luck with your situation.
This income is excluded, which implies that it doesn't even need to be listed on the return. Did you receive a 1099? Did it list the amount as taxable? if it shows as untaxable, the IRS already knows this will not be included. Not a bad idea to spend a few hundred dollars on a CPA in years where things like this happen.
I agree with my colleagues. Generally, a tax return is used to report income - If the court award is not income, it does not have to be reported. Unfortunately, there are always exceptions, that's why you need a tax professional. Especially, when something out of the ordinary happens.
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.
Be very careful! If the release that was executed prior to your receipt of funds references lost wages, there could be a tax consequence! Ask an attorney experienced in personal injury matters to look over the release!
In no way am I offering you legal advice, and in no way has my comment created an attorney-client relationship. You are not to rely upon my note above in any way, but insted need to sit down with counsel and share all relevant facts before receiving fully-informed legal advice. If you want to be completely sure of your rights, you must sit down with an experienced criminal defense attorney to be fully aware of your rights. Legislation may have recently been adopted that changes the law in this area.
The IRS has a toll free number to answer technical tax questions. Call them. (These types of recoveries are not generally taxable nor reportable. Still, call the IRS.)