I have a client that was injured in an auto accident in 2020. My client was unable to work for several months. My client’s disability pay was paid by a third party that handles disability claims for the company that he works for. My client was not at fault. He had extensive medical bills and rehab therapy. He had to hire an attorney to try to get a reasonable settlement.
A settlement agreement was eventually reached in 2020. The third party disability payer wanted reimbursement for disability paid to my client in 2020. In the final settlement, the third party disability payer agreed to reduce the reimbursement amount owed to them by $4,000. My client received a W-2 for the full amount of disability he received in 2020, but my client reimbursed them $4,000 of the amount he was paid. I and my client’s attorney think that my client's 2020 W-2 he received from the third party disability payer is incorrect. The third party disability payer reported in Box 1 of my client’s W-2 the full amount they paid him. They did not reduce taxable earnings by the $4,000 my client reimbursed them out of his settlement. By not reporting the $4,000 reimbursement by my client to the third party disability payer, it is costing my client around $1,000 in additional federal income tax that he should not owe for 2020.
My client’s attorney sent a letter to the third party disability payer asking for a corrected 2020 W-2 on March 2, 2021. The attorney attached a copy of the $4,000 check he paid them out of my client’s settlement funds. Neither my client nor his attorney has had any response to the request.
I have a copy of the check that the attorney wrote to the third party disability payer, and it was endorsed and deposited by the third party disability payer. The other kink is the check to reimburse the third party disability payer was dated 1/29/21 due to the way insurance companies hold on to their funds as long as possible. I realize that the third party payer probably did not have time to adjust my client’s W-2 if they were even going to, but they knew that claim had been settled in 2020 and that they would be receiving $4,000 from my client’s attorney when the attorney received the settlement funds.
The disability pay my client received was 80% of his regular salary, and he is in no position to pay the IRS an additional $1,000 for the 2020 tax year after paying the third party payer $4.000.
I have never run into a situation like this. Has anyone prepared a tax return with this fact pattern? If you have or you can offer advice on how to report the 2020 W-2 form the third party disability payer issued to my client that is wrong, I will be very grateful for your thoughts and experiences.
Thank you.
