Author Topic: Confusion regarding "personal injury" and taxes? Can someone clarify this?  (Read 246 times)

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flaccito

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This call was forwarded to me regarding the recent Equifax mass-hack security breach. The issue of income taxes was briefly brought up (28:00 - 36:00) in the course of the casual discussion. The gist of it is the caller was apparently audited for failing to report settlement income he got from some consumer lawsuits he filed a few years back, then he simply claimed the settlements were proceeds from a "personal injury" and the IRS apparently wrote him back saying he was right and that he owed 0 (huh?!!?).

Here's a link to the podcast in question:

http://www.freeconferencing.com/playback_nv.html?n=/storage/sgetFC/OZ4nw/u2eF3

Also on this call, it is apparently "standard advice" to send out 3949A forms to dispute all 1099 settlement income as "personal injury" to reduce the tax owed to 0. There was also mention of simply including the words "personal injury" in settlement agreements to do the same thing.

Was listening to this last night and was wondering which one is it, are these consumer settlements taxed or not? There is so much conflicting information out there, especially hearing this caller's account of the IRS allegedly "agreeing" with his position that he owed no taxes on his settlements.

If it's true that the IRS "agrees" with 0 tax being owed on these consumer settlements, how do the rest of us get our money back? lol

Some clarification on this issue would help, did this guy just confuse the IRS computers? Just a fluke? Or is there something to this?

Flyingifr

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Re: Confusion regarding "personal injury" and taxes? Can someone clarify this?
« Reply #1 on: September 11, 2017 03:29:03 PM »
This call was forwarded to me regarding the recent Equifax mass-hack security breach. The issue of income taxes was briefly brought up (28:00 - 36:00) in the course of the casual discussion. The gist of it is the caller was apparently audited for failing to report settlement income he got from some consumer lawsuits he filed a few years back, then he simply claimed the settlements were proceeds from a "personal injury" and the IRS apparently wrote him back saying he was right and that he owed 0 (huh?!!?).

Here's a link to the podcast in question:

http://www.freeconferencing.com/playback_nv.html?n=/storage/sgetFC/OZ4nw/u2eF3

Also on this call, it is apparently "standard advice" to send out 3949A forms to dispute all 1099 settlement income as "personal injury" to reduce the tax owed to 0. There was also mention of simply including the words "personal injury" in settlement agreements to do the same thing.

Was listening to this last night and was wondering which one is it, are these consumer settlements taxed or not? There is so much conflicting information out there, especially hearing this caller's account of the IRS allegedly "agreeing" with his position that he owed no taxes on his settlements.

If it's true that the IRS "agrees" with 0 tax being owed on these consumer settlements, how do the rest of us get our money back? lol

Some clarification on this issue would help, did this guy just confuse the IRS computers? Just a fluke? Or is there something to this?

Here's the law: A Personal Injury settlement is a settlement for an actual medically verified bodily injury or illness. This would usually entail some loss of blood, but not necessarily. I have a client getting ready to sue the IRS over this issue - his personal injury was stress induced heart palpitations that involved an ambulance ride and hospital admission. A settlement over Statutory Damages, hurt feelings, embarassment, "false light defamation" or other such things do not qualify. Personal Injury lawsuit settlements are tax free. All others, by Statute, are taxable (IRC 104(a)(2)).

Here are the facts: Yes, you can get away with it as long as the IRS chooses not to audit the issue. If they do audit, expect to lose unless you have actual medically verifiable bodily injury.  IRS examination personnel are stretched pretty thin at this point so unless there are a lot of dollars at stake, and audit wold seem unlikely.
BTW-the Flyingifr Method does work. (quoted from Hannah on Infinite Credit, September 19, 2006)

I think of a telephone as a Debt Collector's crowbar. With such a device it is possible to pry one's mouth open wide enough to allow the insertion of a foot or two.

Debtors Exams are the perfect place for us Senior Citizens to show off our recently acquired Alzheimers.

Founder of the Credit Terrorist Training Camp (Debtorboards)

flaccito

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Re: Confusion regarding "personal injury" and taxes? Can someone clarify this?
« Reply #2 on: September 11, 2017 04:23:23 PM »
Here's the law: A Personal Injury settlement is a settlement for an actual medically verified bodily injury or illness. This would usually entail some loss of blood, but not necessarily. I have a client getting ready to sue the IRS over this issue - his personal injury was stress induced heart palpitations that involved an ambulance ride and hospital admission. A settlement over Statutory Damages, hurt feelings, embarassment, "false light defamation" or other such things do not qualify. Personal Injury lawsuit settlements are tax free. All others, by Statute, are taxable (IRC 104(a)(2)).

Here are the facts: Yes, you can get away with it as long as the IRS chooses not to audit the issue. If they do audit, expect to lose unless you have actual medically verifiable bodily injury.  IRS examination personnel are stretched pretty thin at this point so unless there are a lot of dollars at stake, and audit wold seem unlikely.

That's the thing though, according to the caller he was audited (that's what he was calling in about), but he merely claimed his Tcpa settlement proceeds were a "personal injury" and subsequently received a response letter from the IRS saying he owed 0 tax.

What you wrote clarifies a lot, I'm guessing the caller somehow "tricked" the system. That, or he's a "small fish" that a flesh-and-blood agent is not willing to investigate right now.

The alleged response letter from the IRS saying he owed 0 tax is what really got my attention. Flukes do happen, but it's not often you hear of IRS saying "yeah, ok, you don't owe any money", usually it's the opposite and they double-down on "you owe us money" position.

Flyingifr

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Re: Confusion regarding "personal injury" and taxes? Can someone clarify this?
« Reply #3 on: September 11, 2017 06:09:14 PM »
That's the thing though, according to the caller he was audited (that's what he was calling in about), but he merely claimed his Tcpa settlement proceeds were a "personal injury" and subsequently received a response letter from the IRS saying he owed 0 tax.

What you wrote clarifies a lot, I'm guessing the caller somehow "tricked" the system. That, or he's a "small fish" that a flesh-and-blood agent is not willing to investigate right now.

The alleged response letter from the IRS saying he owed 0 tax is what really got my attention. Flukes do happen, but it's not often you hear of IRS saying "yeah, ok, you don't owe any money", usually it's the opposite and they double-down on "you owe us money" position.

The OP refers to a CP-2000 letter from the IRS - this is a clerical administrative thing, not an audit. See the red portion.

Quote
The gist of it is the caller was apparently audited for failing to report settlement income he got from some consumer lawsuits he filed a few years back, then he simply claimed the settlements were proceeds from a "personal injury" and the IRS apparently wrote him back saying he was right and that he owed

This correspondance from the IRS was asking for an explanation as to why the settlements are not on the taxpayer's return. The OP replied. IRS accepted that as answering their question, but not as to the correctness of the tax treatment of these payments. Assessment Statute Expiration Date (ASED) is 3 years from the later of the due date of the return or its actual filing date.
BTW-the Flyingifr Method does work. (quoted from Hannah on Infinite Credit, September 19, 2006)

I think of a telephone as a Debt Collector's crowbar. With such a device it is possible to pry one's mouth open wide enough to allow the insertion of a foot or two.

Debtors Exams are the perfect place for us Senior Citizens to show off our recently acquired Alzheimers.

Founder of the Credit Terrorist Training Camp (Debtorboards)