Does the IRS tax lawsuit awards?

Whenever a relatively large financial transaction occurs, it is very likely that the Internal Revenue Service (IRS) will be involved. Getting divorced? The IRS will look over the property division determination and check for errors. If so, the agency may apply applicable taxes. Win the lottery? The IRS will expect a share of the winnings? Going through a lawsuit? Yes, even during your legal woes the IRS may determine that you owe a tax bill.

How can taxpayers reduce the headache that comes with tax obligations owed after winning a lawsuit?

The most important thing to do: plan. It is important to know the impact of tax obligations before settling the lawsuit.

How does the IRS determine tax obligations on lawsuit awards?

The IRS looks at the type of lawsuit, referred to as the "origin of the claim," to determine whether or not there is a tax obligation. This determination is very complicated, particularly after recent tax reform with the passage of the Tax Cuts and Jobs Act.

For example, the IRS likely taxes lawsuit winnings for lost wages as income. However, the agency may apply a different tax rate to a pain and suffering award. It is also important to note the IRS almost always taxes punitive damages, or those awarded solely to punish the other party and deter future wrongdoing. This can be tricky, as punitive damages are often tied to personal injury cases. Why is this tricky? Because the IRS does not tax awards for physical injuries. This makes figuring out what is and is not taxed particularly difficult.

This combination is just one example of the issues that can arise and make determining the tax impact of a lawsuit very difficult to navigate. A failure to follow the rules can result in a federal tax audit. Those who are the subject of an audit by the IRS are wise to take the matter seriously. An attorney experienced in IRS audits can review your situation and discuss your options.

No Comments

Leave a comment
Comment Information
Email Our Team

Contact Us to Get Started Today

Located in the Washington, D.C area, we serve clients in the District of Columbia, Maryland and Northern Virginia, as well as across the country and overseas. For a free initial consultation, call 202-381-1261 or complete our brief online form.

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Six Convenient Office Locations in and around the DC Metropolitan Area

Washington, D.C.
1050 Connecticut Ave NW #500
Washington, D.C. 20036

Phone: 202-618-1873
Fax: 888-235-8405
Washington Law Office Map

Columbia Office
10440 Little Patuxent Parkway, Suite 300
Columbia, MD 21044

Phone: 410-497-5947
Fax: 888-235-8405
Columbia Law Office Map

Annapolis Office
839 Bestgate Road
Suite 400
Annapolis, MD 21401

Phone: 410-497-5947
Fax: 888-235-8405
Annapolis Law Office Map

Fairfax Office
8280 Willow Oaks Corporate Drive
Suite 600
Fairfax, VA 22031

Phone: 703-621-7169
Fax: 888-235-8405
Fairfax Law Office Map

Rockville Office
199 E. Montgomery Avenue
Suite 100
Rockville, MD 20850

Phone: 240-599-5009
Fax: 888-235-8405
Rockville Law Office Map

Baltimore Office
400 East Pratt Street
8th Floor
Baltimore, MD 21202

Phone: 443-743-3381
Fax: 888-235-8405
Baltimore Law Office Map