Today TaxMama® hears from Marisa in the TaxQuips Forum, with this problem.  Let me summarize. (You can read the details.) “After her father’s death, Marisa received a settlement from a drug company class action suit. It was not taxable in her state. But now she has a notice from the IRS demanding taxes, based on a 1099MISC issued under her name and SSN. What should she do?”

Dear Marisa,

So sorry you’re going through this stress. But…take a deep breath.  There’s nothing to worry about.

First of all, the letter you got is making a ‘proposed’ assessment. It’s not written in stone yet.

Second, this income is not taxable for federal purposes. But the IRS doesn’t know it until you tell them.

Clearly, it’s for damages to his health (drug co related). Settlements on physical damages are not taxable.

If you have anything at hand to explain what the settlement is, just send a reply to the IRS with a copy of the document (the paperwork you gave the court should suffice). They will remove the assessment.

If you no longer have anything on hand, send them a reply with an explanation anyway. Tell the IRS you will be sending them proof soon. Get copies of paperwork you need. And send it along with the IRS document number on the IRS letter you received.

The key is – REPLY ASAP.

And remember, you can find answers to all kinds of questions about IRS assessments and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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