Can the IRS take my Personal Injury Settlement?

Can the IRS take my Personal Injury Settlement?

When someone suffers injuries as a result of another party’s negligence, he or she might feel that the Internal Revenue Service is making those injuries worse when it takes any portion of a settlement award for those injuries. However, if the IRS has placed a lien on a person’s assets and resources, it can take a personal injury settlement to resolve the back taxes that are behind that lien when the settlement amount is deposited into an injured party’s bank account. Further, even if no lien has been filed, the IRS can levy taxes against portions of a settlement that are not intended as reimbursement for property losses and physical injuries.  

The Los Angeles personal injury lawyers at Ellis Injury Law fight to recover the largest available damages awards for parties that have suffered injuries in car accidents, slip and fall mishaps, and other negligence situations. We understand that those damages should place you in the same position you were in before the accident and compensate you for all of your resulting extra costs and expenses. We factor tax effects into all of our lawsuit settlement negotiations and calculations to give our clients the best assurances possible that their damages awards will not be eroded by tax problems.   

When will the IRS file a tax lien against someone? 

The IRS will file a tax lien against an individual taxpayer when that person fails to pay federal taxes after the IRS has made a demand for payment. A tax lien does not automatically transfer ownership of the property to the IRS but establishes a claim that can affect how property is used. For example, if the lien extends to a bank account, it can prevent the account owner from withdrawing or using funds in the account until the lien is resolved.  

When you hire a personal injury lawyer to represent you in a negligence and accident lawsuit, be sure to tell your lawyer about any tax liens that have been filed against you and any other tax problems that you might have with the IRS. Your lawyer will then be able to factor those liens and problems into the strategy for your case.    

Will a tax lien affect the calculation of a personal injury settlement award? 

Tax liens frequently arise when someone has not filed tax returns, in which event the IRS estimates how much that person earned and calculates taxes against the estimated amount. An injured party’s personal injury settlement often includes reimbursement for salary and wages that the party did not receive when injuries prevent him or her from working. If the injured party does not have pay stubs or salary records showing his or her wages, a personal injury lawyer will use tax returns as evidence of those wages. In this situation, the tax lien itself might not affect settlement calculations, but the absence of tax returns that gave rise to the lien will complicate negotiations over damages for lost wages.  

Can the IRS tax a personal injury settlement? 

Personal injury settlements are generally not considered to be income that is subject to taxation. Rather, a settlement is intended to reimburse an injured party for costs and expenses that are paid to reimburse economic losses. Certain categories of damages are not within the definition of economic losses: 

  • punitive damages, which are awarded in extreme cases to penalize the party that caused the accident on account of his or her intentional or extreme egregious conduct 
  • interest on damages that accrues as an award is paid out over time or is paid after a long delay 
  • damages for emotional trauma, for example, the stress that an injured party experiences as a result of witnessing another person’s serious injuries. 

Experienced personal injury attorneys will always verify that settlement agreements include detailed explanations of how damages were calculated and what categories of injuries those damages are intended to compensate. The IRS will generally defer to the language in the settlement agreement in determining whether any portion of a personal injury damages award is subject to taxes. 

Call Ellis Injury Law for more information on IRS claims to personal injury settlements 

IRS and other tax issues should never prevent an accident victim from seeking compensation for property losses and injuries from a negligent party. The Los Angeles personal injury lawyers at Ellis Injury Law have assisted hundreds of Southern California accident victims to recover the largest available damages that they are entitled to receive.

Please see our website or call us to speak directly with an experienced accident and injury lawyer about your IRS tax issues and your potential to recover the full damages you deserve after your accident.