Severance payment is not like regular compensation and benefits where you have a right to receive the income and you will have to report the income as taxable so long as it is not subject to substantial risk of forfeiture and there is constructive receipt. Refusal to take possession of regular compensation and benefits does not change the fact that there is constructive receipt and such amounts must still be reported as taxable income.
However, it is unusual for severance to be written into the contract (except for some very senior executives who may have negotiated certain termination benefits in their employment agreements, often with input from their legal counsels, at the time of hiring). There may also be times that company policy provides for separation payment, the entitlement of which is computed based on certain formula. In cases such as these, severance payments made in accordance with those terms should be considered taxable income because there is constructive receipt notwithstanding additional claims the taxpayer may pursue against the employer or other parties.
In other cases, severance packages are negotiated and unless there is mutual consent to an agreement (which often include additional employee obligations such as NDA, non-compete, no disparaging remarks, agreement not to file suits, etc.) that is signed by both parties, no payment will be made by the employer and no income is to be recognized.
Another possibility is that payroll somehow made a payment unilaterally without the employee agreeing to that package but the employee did not return it with an objection, it may amount to an agreement and that amount may then be considered taxable income.
In this case, I'd find out if any of the above is relevant, review all the contracts and agreements, and get a better understanding of the impending legal actions. Needless to say these would be billable hours.
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Still an AllStar
