Do I have to pay IRS taxes on settlement money I received in 2006?

Question

Back in 2006 I received 73,000.00 from a settlement before attorney fees, after which I recieved 43,000.00. In this type of settlement if my Mother would have been alive she would have recieved this money,but since she is deceased my sibblings and I are the next in line in the family tree to recive the money. My brother and I both called the IRS to discuss the 1099 form with them and we both recieved the same answer which was that "we were recooperating a loss and and it could be classified as an inheairatance" and that "we did not have to do anything". She then explained the article and section # to support her answer that I neglected to document.

I had Jackson Hewitt prepare my tax return for 2006 and showed them my 1099 form I that I had recieved from the attorney.I also told them that I had spoke to an IRS person at the 1-800 number and told her what I was told by the IRS rep.

Now, I recieved a letter from the IRS saying I owe taxes.I felt confident I was filing my taxes correctly after speaking to an IRS rep. and having Jackson Hewitt prepare my taxes with all the documents in front of them.

My Question's are: Did Jackson Hewitt fail to file a form with my tax return to report this non taxable income and was I given wrong information by the IRS rep.at the 1-800 number when I called?

Thanks

Answer 1

It is possible that you received incorrect information from both Jackson Hewitt and the phone inquiries from the IRS.

It is possible that the money that was awarded to your mother was taxable to her.  Not all settlements are tax-free.  If the settlement was taxable to your mother, it is going to be taxable to you.  

However, if the settlement was not taxable to your mother (as in a physical injury case), then it is not taxable to you.

At this point, take your correspondence from the IRS, your 2006 tax return, and any correspondence or documents from the insurance company or attorney to a professional.  You can try to go back to the preparer and insist they review your case at no cost since you paid for tax preparation.  

If the preparer was in error, they will at least pay penalties and interest, and in some cases part of the tax due if you paid for that guarantee.

If the IRS letter is in error, you need assistance in preparing the correct response and documentation that you do not owe additional tax.

If you do not get satisfaction from your local preparer, you can escalate this to their corporate headquarters.  Other than that, you would have to go to another professional because this is too much money to try to handle alone, or just pay what the letter says you owe.

Answer 2

Have Hewitt refile, using correct tax forms.

You should not owe any federal taxes, as inheritances are not taxed if under at least a million dollars, perhaps higher now.

You may owe some state inheritance taxes, but again Hewitt will have to check your own state laws on that.

Sometimes IRS makes "mistakes" because documentation on your tax returns doesn't match what they show in their computers.

Everything has to balance, as they are not psychic, nor can they know you have inherited money, as opposed to have won it in a lottery.

My condolences on loss of your mother, mine died too, just last month.  She left no assets for me, I wont have any IRS problems over that.

Answer 3

There is no tax on inheritances.  Read: http://taxipay.blogspot.com/2008/02/tax-...  

However, if any part of settlement money was taxable in the hands of your mother, then it is taxable in your hands.

Part of settement may be taxable depending upon:

1. Physical injuries or physical sickness settlements are generally non-taxable if you did not take an itemized deduction for medical expenses related to this injury in prior years.

2. Interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable.

3. Loss-of-use or loss-in-value of property settlements may be taxable if the settlement exceeds your basis in the property.

Read Publication 4345. Settlements - Taxability.

Answer 4

It doesnt sound like an inheritance. Your mother would have already had to have the money and leave it to you. It sounds like the settlement came after her death so it came to you instead. That isnt an inheritance. You would not have received a 1099 from an inheritance.