Lawsuit Question

Technical topics regarding tax preparation.
#1
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Had a new client reach out to me due to receiving a CP2000 notice. Notice is showing that the taxpayer did not report any of their 2019 social security payments. Problem is the client was involved in an auto accident where a young man hit their car at a stop because he was texting and the payments were part of the lawsuit proceeds. This caused my client to have to get back surgery, etc. I pulled the transcripts and compared to the notice. The IRS is calculating that 27K of the social security payments are taxable. Here is where I need help:

Total Payments: 231,712
Repayments: 148,956
2018 Workman Comp Offset: 18,684
2017 Workman Comp Offset: 7,630

#1) If I plug the 231K less the 148K in repayments, I get close to the IRS's calc. However, shouldn't I be factoring in the workman comp offsets as well?

#2) The client was under the "assumption" that the proceeds were non-taxable. Assuming I need to follow-up with her attorney to double check this?


Thanks!
 

#2
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Your description is confusing. How can the social security payments be part of the lawsuit proceeds?
Steve
 

#3
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gatortaxguy wrote:Your description is confusing. How can the social security payments be part of the lawsuit proceeds?


Great question. According to the client everything was supposed to be paid out as a bodily injury claim, so not taxable. I'm following up with her lawyer, maybe there were additional funds paid through disability or something like that because the accident did put her on disability.


Thanks!
 

#4
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I'm still confused. Did the TP report the SS benefits or not?
Steve
 

#5
NYea  
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gatortaxguy wrote:I'm still confused. Did the TP report the SS benefits or not?


Original poster wrote: Notice is showing that the taxpayer did not report any of their 2019 social security payments.

While workers compensation is usually not taxable, §86(d)(3) treats these WC offsets as "social security" benefits. They are treated in the same manner as "normal" SS benefits. The repayments paid in the same year as the SS payments do reduce the benefits subject to tax but the WC offsets will not.
 

#6
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The IRS position is that he did not report. I asked whether he reported.
Steve
 


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