Can The IRS Take My Personal Injury Settlement?

If you suffer injuries due to another party’s negligence, you could be concerned about the IRS taking part of your settlement.

For anyone who has back taxes, it is possible the IRS will take part of a personal injury settlement. If there is already a lien on any of your personal property, the IRS could take some of any anticipated settlement for unpaid taxes behind the federal tax lien. This is liable to happen when you deposit your compensation check into your bank account. 

Equally, even if the IRS has not yet filed a lien, it could still levy taxes against some components of your personal injury settlement – those not intended to compensate you for property loss or personal injury.

So, while the Internal Revenue Service might take a portion of your personal injury settlement, this only happens in certain situations. You should retain an experienced personal injury attorney and they can help you receive compensation that leaves you in the same financial position as you were in before the accident.

What’s In This Guide:

    When does the IRS file a tax lien against an individual?

    The IRS files a tax lien against a taxpayer if they fail to pay federal taxes after a formal demand for payment has been made.

    While a tax lien will not automatically transfer property ownership to the Internal Revenue Service, it will nevertheless establish a claim that can influence how that property is used. If the lien extends to your bank account, for instance, this can stop you from using funds in the account or from withdrawing cash until the lien has been resolved.

    If you are involved in an accident and negligence lawsuit or claim, you should consider retaining an attorney. Always tell any lawyer representing you about all tax liens filed against you, if any. You should also elaborate on any other tax issues you face with the IRS. This will enable your attorney to factor the liens and other issues into your case strategy.

    Do tax liens impact the calculation of personal injury settlement awards?

    A tax lien often arises when someone fails to file tax returns. If this happens, the IRS estimates the earnings of that individual and calculates taxes accordingly.

    When someone is injured in an accident, the personal injury settlement frequently includes compensation for lost earnings, when injuries prevent the person from working. If the person injured does not have salary records or pay stubs to prove those lost earnings, a personal injury attorney will use tax returns as evidence of wages.

    If the above situation occurs, the tax lien itself may not impact settlement calculations, but there could be complications when negotiating for damages for lost earnings due to the absence of tax returns triggering the lien.

    Will the IRS tax your personal injury settlement?

    A personal injury settlement is not typically considered as income subject to taxation. These settlements are intended to reimburse injured parties for the expenses and costs caused by the accident, as well as for pain and suffering.

    Some classes of damages are not included under economic losses:

    • Damages for emotional trauma. This could be damages for the stress experienced by an injured party who witnesses another person being seriously injured.
    • Punitive damages. These are awarded in some extreme cases of egregious conduct. The intention is to penalize the party at-fault for this conduct.
    • Interest on damages accruing as a staged settlement is gradually paid out, or if a settlement is paid after a lengthy delay.

    If you hire an experienced personal injury lawyer, this will verify that your settlement agreement included a detailed explanation of the damages calculation, as well as the categories of injuries the damages are intended to reimburse.

    The IRS normally defers to the language used in your settlement agreement when determining whether a portion of this personal injury settlement award is subject to taxes.

    Call Provident Lawsuit Loans for more information concerning IRS claims to your personal injury settlements

    If you sustain injuries as a result of an accident someone else causes, you are legally entitled to seek compensation for those injuries, as well as for damage to your vehicle, and damages for pain and suffering. Even if you have tax issues with the IRS, you should not forego this compensation.

    Many people injured in an accident do not realize it can take months, sometimes even years, to receive any compensation at all. This can present pressing financial difficulties as you face mounting medical bills at the same time as needing time off work to recuperate. Reach out to Provident Lawsuit Loans to speak about a settlement cash advance. Get money now in exchange for a portion of your anticipated settlement, and only repay this advance if your claim is successful.

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