Thread: Taxes on FDCPA/FCRA Settlements?

Hello all.

As I am getting my act together to file my taxes for TY2002 I realize that I have some FDCPA / FCRA settlement income.

Everything I have found so far on "that there in-tar-net" tells me that it is taxable at the same rates as regular income. I was hoping someone here has the definitive answer and also hoping that others here have the same issue to deal with. ;)

I figure that a backhanded way for a CA to get back at someone who filed against them would be to report the settlement to the IRS with the idea that the IRS would discover that the payee didn't report it and would thus provoke the rath of our good friends from the IRS.

Thanks!

Originally posted by slykens
Hello all.

As I am getting my act together to file my taxes for TY2002 I realize that I have some FDCPA / FCRA settlement income.

Everything I have found so far on "that there in-tar-net" tells me that it is taxable at the same rates as regular income. I was hoping someone here has the definitive answer and also hoping that others here have the same issue to deal with. ;)

I figure that a backhanded way for a CA to get back at someone who filed against them would be to report the settlement to the IRS with the idea that the IRS would discover that the payee didn't report it and would thus provoke the rath of our good friends from the IRS.

Thanks!

Are you talking about the "pay my $1000 for violating my rights" or taxes due for settling a debt for less than full value?

The "pay me $1000" is generally not taxable - it is reimbursement for damages suffered. Settling a debt for less than full value is taxable as miscellaneous income.

Thanks for the reply.

I am talking about settlement in consideration of dismissal of a lawsuit or not filing one to begin with.

You mention that they are generally not taxable; do you have an example of when they would be taxable? (ie If they are awarded punitive damages?)

I sucessfully negotiated a (legal) settlement with a CA early last year and received a check and I want to be sure that the CA or their attorney do not try to cause me problems with the IRS in regards to this.

I don't plan to file my taxes until the first week of February, just to make sure a stray 1099 doesn't appear but I am starting to get my act together so I can do it quickly. I don't like to loan the government my money any longer than I have to.

Thanks again.

I was told by my accountant that it is taxable income.

The only type of settlement or court award that isn't taxable is personal injury and accident awards or settlements. That money is tax free.

If the person you sued didn't ask you to fill out a W9 form then most likely the IRS won't know about the settlement unless they do an audit on you.

This of course is not legal to not report it though.

Tac

Very timely topic.... here's my scenario and if anyone can provide help it would be greatly appreciated.

Just yesterday my wife received a letter from the IRS saying that she owed taxes on a charge-off from 2000. This was an FCNB account that had been charged off right before we met. In the early process of cleaning her credit last year I mistakenly decided that we should pay off the $1400 that had been charged off thinking that a paid charge-off would be better than an unpaid charge-off from a credit score standpoint (and, admittedly a moral standpoint too). Anyway, we went ahead and paid the full $1400 amount to the CA that the acct. had been turned over to.

So, it has been paid in full, but now we get a letter from the IRS saying that she owes taxes on the original charge-off. Not sure who we should contact about this and what kind of paperwork will be necessary to clear it all up.

Any advice would be greatly appreciated.

TIA!
Kirk

So, it has been paid in full, but now we get a letter from the IRS saying that she owes taxes on the original charge-off.
c5kirk |
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If you paid it in full there is no charge off.
LB 59

Exactly!! You would only owe taxes if FCNB reported that you settled for less then the full amount owed.

I would contact the IRS and alert them to this and find out how much FCNB stated you paid them.

Tac

Settling a debt for less than full value is taxable as miscellaneous income.
cannoda
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It is not an income gain, it is a loss of income.

Originally posted by c5kirk
...In the early process of cleaning her credit last year I mistakenly decided that we should pay off the $1400 that had been charged off thinking that a paid charge-off would be better than an unpaid charge-off from a credit score standpoint (and, admittedly a moral standpoint too). Anyway, we went ahead and paid the full $1400 amount to the CA that the acct. had been turned over to.

So, it has been paid in full, but now we get a letter from the IRS saying that she owes taxes on the original charge-off. Not sure who we should contact about this and what kind of paperwork will be necessary to clear it all up.

Any advice would be greatly appreciated.

TIA!
Kirk

If it was paid in full respond to the IRS explaining that fact along with cancelled check or other proof. Good luck.

Originally posted by lbrown59
Settling a debt for less than full value is taxable as miscellaneous income.
cannoda
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It is not an income gain, it is a loss of income.

The IRS, of course, considers the difference between what you owed and what you paid as income.