If you’ve received a settlement for a lawsuit, you need to meet with an expert tax attorney right away and discuss the settlement with them. This is the best way to be absolutely certain about whether or not the settlement is taxable, information you need to have long before you file this year’s return.
The main thing that determines whether or not you have to pay taxes on your settlement is the type of settlement you’ve won. For example, if you were awarded a settlement because you were injured while in the hospital, it’s a non-taxable settlement. However, before you want to exclude it from your tax return, take a look at the itemized deductions you’ve made. If that same injury is on there, the IRS gets a chunk of your settlement.
Settlements that are taxable include:
• Punitive damages
• Interest on the settlement
• Defamation of character
• Mental/emotional suffering
Don’t be surprised if your tax attorney looks at your settlement and tells you that part of it is taxable while another isn’t. If the settlement you’ve won includes interest, you’ll need to report the exact amount of interest received on Form 1040, line 8a when you file your 2015 income tax return. Something else you need to keep in mind is that just because the federal government doesn’t require you to pay taxes on a settlement, your state might have different requirements.
The fact that you earned a settlement could be all it takes for the IRS to decide to audit you. It uses things like settlements and large increases in income as red flags to help determine which portion of the 1.1% of the population should be audited. The fact that there’s now an increased chance of you coming to the attention of the IRS, it’s extremely important that you avail yourself of the services provided by a tax evasion attorney. You should do this before filing your tax returns. The tax evasion attorney has a deep understanding of current tax laws and will go over every aspect of your situation and make sure a mistake hasn’t been made.
If you have filed your taxes without the assistance of an attorney, and are now being questioned by the IRS, you need to find a good lawyer right away. With their help, you should be able to prove that you made a genuine mistake on your forms or didn’t understand the law when you filed. You will still owe back taxes, but the mistake will only add a 20% penalty to what you owe, whereas if the IRS decides you made a willing error on your tax return, they’ll consider it tax fraud/evasion and the penalty attached to your outstanding bill will be 75%, and it will be very difficult to negotiate a settlement.
If you’re being audited and are worried you made an error on your tax return, the best time to contact a tax evasion attorney is immediately after receiving the notification from the IRS.