Tax Settlement

There are two types of tax settlements that people commonly confuse. One type of "tax settlement" is for those who have settled a lawsuit and wonder if they need to pay taxes on their settlement. The other type of tax settlement is through an Offer in Compromise, is when a tax payer owes the IRS and their state government backtaxes based on their tax returns.

Taxes on Settlement

When you settle a civil court case or a lawsuit for a cash settlement, most of the time you will need to pay taxes on your settlement. Depending on the type of lawsuit and whether or not you will owe anything. For example, if the settlement was for lost wages in cases for discrimination, then you will need to pay taxes for your settlement since the income will be treated as if you earned that income working, which is taxed. If the settlement was for pain and suffering or medical related, then you will likely not have to pay taxes. If you are even a bit unsure, seek the assistance of a licensed CPA who will be familiar with the tax laws for your specific case.

IRS Tax Relief Settlement

The IRS offers a tax debt relief program to help those who owe more taxes than they can afford to pay. This is done through an Offer in Compromise form that one can fill out on their own or seek a tax relief professional to help. Most personal finance recommend that if you owe more than $10,000 in back taxes, that you seek the help of a IRS debt attorney or expert to help since there is a lot more at stake since the IRS examines those requests a lot more closely. If you owe less than $10,000 in back taxes, then you may want to try complete the Offer in Compromise yourself.