Malpractice Settlement

Today TaxMama® hears from Peter in the TaxQuips Forum with this story “I have just settled an attorney malpractice litigation where a small settlement was received. The insurance company wants my Social Security Number, which I feel is not needed.

My position is that I am only recovering a fraction of what the attorney was paid for his services during his representation, and that this is what the recovery is for. I cannot find IRS Tax code on this matter. Can you give me clearer advice?”

Ask TaxMama

Hi Peter,

Congratulations! You mean people DO get settlements? Good for you.

But if you want your money, you WILL give them either your Social Security Number or your Business’ taxpayer ID number, depending on who the settlement is paying.

If you don’t, they WILL withhold 28% – 30% of your money. And without a taxpayer ID number, you’ll have a hard time getting it back, since they won’t have a tax ID to match.

Now, regardless of your position or resentment, however justified, I am willing to bet that you deducted every penny of legal fees you paid, in the year you paid them, right? Now, when you receive this reimbursement, you will pay tax on it, just as you took the deductions earlier.

There is plenty of information on how IRS regards such things. In fact, there is an audit guide on lawsuit settlements. Would you like to read it?

And remember, you can find answers to all kinds of questions about lawsuit settlements, and other tax issues, free. Where? Where else? At

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