Need help on response to IRS

[peted]

What is the name of your state? CA

My wife was was awarded a Wrongful Termination settlement in 2005. She was pregnant and was laid off...leading to, we believe, a high risk pregnancy...high blood pressure and ultimately a C-Section. We claimed part of the settlement was Personal Injury and thus exempt from taxes. When we filed we simply claimed a smaller amount than than of the whole settlement. The IRS is now asking why we under reported and is claiming we owe taxes on whole amount. The language in the settlement agreement states what I have stated above. I plan to write a letter explaining our side and include a copy of this document. Do I need to include any other documentation? Thanks!What is the name of your state?

 

[abezon]

You need to get a professional to write the IRS, because you will say too much or say it wrong & shoot yourself in the foot. How did you determine what protion of the settlement was for personal injury? If the settlement does not specify, it may be that none of it is taxable, since she had actual medical damages beyond pain & suffering. Consult a tax pro with experience in the taxability of lawsuit settlements.

BTW, one does not explain one's side to the IRS & hope they agree. One tells them the answer in as authoritative a manner as possible so they give up & go away.

 

[LdiJ]

You need to get a professional to write the IRS, because you will say too much or say it wrong & shoot yourself in the foot. How did you determine what protion of the settlement was for personal injury? If the settlement does not specify, it may be that none of it is taxable, since she had actual medical damages beyond pain & suffering. Consult a tax pro with experience in the taxability of lawsuit settlements.

BTW, one does not explain one's side to the IRS & hope they agree. One tells them the answer in as authoritative a manner as possible so they give up & go away.

I agree with this 100%!!

 

[peted]

Wording in the Agreement

Here is the exact wording in the agreement

Of the $130,725.00 paid to Mrs. Wife, $45,000.00 is to compensate her for alleged personal physical injuries, and $85,725.00 is to compensate her for alleged non-physical injury damages arising from her discrimination claims.

Thanks!

 

[tranquility]

Per section 104(a)(2) the amount for physical personal injury is excluded from income. However, you must include as income any amount which has already been deducted (As medical expenses.) on previous returns. Be aware your insurance company will probably want reimbursement from the settlement for any money they paid for treatment. It seems, without more, the $45,000 is excludable per the above limitation.


I believe the $85,725 may very well be taxable. But, because the suit was for an unlawful discrimination case, you can take the attorney fees applicable (if contingent) as an above-the-line deduction per code section 62(a). The fees may need to be allocated between the excludible portion and the income portion of the settlement and I would need to research case law to be sure.

Bottom line is that you need to see a tax professional to write the letter. With this much money (and potential penalties and interest), it would well be worth the cost.

 

[LdiJ]

Here is the exact wording in the agreement

Of the $130,725.00 paid to Mrs. Wife, $45,000.00 is to compensate her for alleged personal physical injuries, and $85,725.00 is to compensate her for alleged non-physical injury damages arising from her discrimination claims.

Thanks!

I will reiterate the previous advice from Abezon. You REALLY need to get a tax pro to write the letter for you.

Also, did you claim the medical expenses on your schedule A? If you did, and you didn't also claim the income from the settlement (45,000 for physical injuries) that's another possible problem.