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Class action Settlement: taxable or not? Disagreement with accountant

Home Tax Reduction Class action Settlement: taxable or not? Disagreement with accountant

  • Phoenixdown99 Phoenixdown99 
    Participant
    Status: Physician
    Posts: 116
    Joined: 03/20/2017

    I am part of a class action settlement. My accountant feels the settlement is likely taxable because “emotional” injuries are taxable whereas “physical”’ones are not. Aside from this ridiculous dichotomy from a physiological standpoint, there seems to be a mix in what I’m reading online about whether PTSD is considered a “physical” injury by courts. It seems in some cases it is and in some it is not. I would like to try to argue that it is, but my accountant appears hesitant and says there may be “huge penalties.” What should I do?

    #197939 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 5396
    Joined: 01/12/2016

    I’d go off the settle paperwork and wording, as a quick skim reveals its much deeper than the above and depends on type of award as well, ie compensatory vs. punitive etc…I’d ask your lawyer for starters or a different accountant.

    Scanning the IRS papers yourself is always useful.

    #197944 Reply
    Liked by Craigy
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 326
    Joined: 06/14/2016

    If the amount is significant, consult a tax lawyer.

    #197963 Reply
    Liked by Craigy
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6911
    Joined: 01/09/2016

    It is very important to closely read the settlement documentation and to get a 2nd opinion from a CPA. If the amount is significant, you have a higher than normal likelihood of being audited if you choose not to report it as taxable income assuming the wording is ambiguous. A tax lawyer is probably not necessary until you at least get a second or even a third opinion from an experienced CPA. (Tax lawyers tend to be quite a bit more expensive than CPAs and probably not necessary until and if you are challenged.) If you receive the settlement this year, you have at least a year to do your research. And, yes, read the IRS regs and the settled case law on this topic as you will find much case history on this topic.

    This IRS Audit Guide may be helpful, too.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #198121 Reply
    Liked by Craigy
    Phoenixdown99 Phoenixdown99 
    Participant
    Status: Physician
    Posts: 116
    Joined: 03/20/2017

    So the settlement is in two parts – a 5 figure sum for 2018 and a mid-six figure sum for 2019.

    I feel I should be consistent with whether it is taxable or not, both this year and next year.

    How do I go about finding the right CPA for a second opinion on this? It seems like a very fuzzy area to me.

    #198192 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6911
    Joined: 01/09/2016

    Yes, you will want to be consistent. I don’t know how to tell you to go about finding the right CPA, though. If you are wanting an opinion before April 15, I don’t think you’re going to get it from a CPA with the level of experience you need. You’re going to have to find someone willing to put in the research and sincerely sign on to your POV who will sign the return.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #198503 Reply

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