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out of court settlements..taxable?

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barron69

Junior Member
What is the name of your state? Georgia

This re: an audit from the IRS for 2006. A hedgefund I invested in lost over 100K in 6 months...I sued them without going to court because of the large losses and the way I was enticed to invest with them. I considered this misrepresentation and fraud to a degree. Without admitting to any guilt (per settlement) ..they settled with me and awarded me 60K. I was not "made whole" so I thought this was not ordinary income. I did not include this as income on my 2006 1040. Apparently this hedgefund sent the IRS a 1099 misc. showing this income. I just received notice that they want 20K in taxes plus 4K in penalties and 2K in interest. Should I fight this? I read that settlements are only tax free if it involves injury or illness but, isn't this a loss due to fraud? Would or could this be treated differently? I have 3 more weeks to respond or pay the bill. What do you think? Any help/opinions appreciated here.

Thanks..Barron69
 


LdiJ

Senior Member
What is the name of your state? Georgia

This re: an audit from the IRS for 2006. A hedgefund I invested in lost over 100K in 6 months...I sued them without going to court because of the large losses and the way I was enticed to invest with them. I considered this misrepresentation and fraud to a degree. Without admitting to any guilt (per settlement) ..they settled with me and awarded me 60K. I was not "made whole" so I thought this was not ordinary income. I did not include this as income on my 2006 1040. Apparently this hedgefund sent the IRS a 1099 misc. showing this income. I just received notice that they want 20K in taxes plus 4K in penalties and 2K in interest. Should I fight this? I read that settlements are only tax free if it involves injury or illness but, isn't this a loss due to fraud? Would or could this be treated differently? I have 3 more weeks to respond or pay the bill. What do you think? Any help/opinions appreciated here.

Thanks..Barron69
Did they send you a 1099-misc or a 1099-B? Based on the way that you have explained it, you should have reported the "income" on Schedule D, which would have resulted in a capital loss (original investment of 100k minus 60K in proceeds). Or, if you previously reported the entire 100k as a loss on Schedule D, then you would report the 60k as a capital gain, which would then offset any capital loss carryforward.

Take all of your paperwork, including any previous return where you took any loss relating to this investment, and go see a tax professional. I can just about guaranteed that you will owe little to no tax on the transaction, but you are going to need a tax pro to help you straighten it out with the IRS. You do not need a high priced tax attorney or CPA, just a professional who is experienced in deal with IRS problems.
 

barron69

Junior Member
it was a 1099-misc...does that help me? Thanks so much for the prompt reply...I am going to go seekout a tax attorney in my area today...thanks again. You are a great help! So nice that people take the time to help others like you are doing. Restores my faith in humanity as they say!

Barry
 

barron69

Junior Member
oh and btw..it was in an IRA ..would that make a difference you think? and no I did not take a loss for anything related to this investment previously..thanks again..Barry
 

efflandt

Senior Member
That would make a difference. The loss was in you IRA which was tax deferred. If something had been recovered in your IRA it would not have been taxable at this time. But if the settlement was paid outside of your IRA, apparently that is why it is considered taxable (you had no after tax cost basis).
 

LdiJ

Senior Member
That would make a difference. The loss was in you IRA which was tax deferred. If something had been recovered in your IRA it would not have been taxable at this time. But if the settlement was paid outside of your IRA, apparently that is why it is considered taxable (you had no after tax cost basis).
He/she needs to see a tax pro ASAP.
 

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