Sexual Harassment Settlement

[ariwood22]

Hi Tax Fam!

I have a client who's about to sign a settlement agreement for allegations of "sexual harassment" and "physical sexual assault". The settlement agreement refers to defendant as the "Putative Defendant" through the settlement agreement and the defendant is not admitting to guilt. The settlement agreement also states the payments will be reflected on Form 1099-MISC for tax purposes. 

I'm aware IRC section 107 exclude from gross income amounts received on account of personal physical injuries.

Would this be considered punitive damages and taxable? 

Or should it be assumed she was physical injured, and this should be considered damages from sexual harassment where it's not taxable and no Form 1099 should be issued?

[Terry53029 · Accepted solution]

It is a grey area, but I found a good article from Forbs may help you.  https://www.forbes.com/sites/robertwood/2021/08/11/irs-tax-on-sexual-abuse-settlements-needs-clarifi.... Good luck

[BobKamman]

Most damages are not punitive.  Including these.  Especially when not awarded by a jury.  

Why do you think you have to assume she was physically injured?  You're not the jury, you're on her side.  Does she say she was physically injured?  Does the settlement agreement describe what happened?  Was there any medical treatment for injuries?  Your job is not to prosecute, but to educate.  Explain to her, "If you can't make the case to IRS that physical injuries were involved, then you will have to pay tax on it.  You can either give up now, or you can wait and see what happens after the return is filed."

[rcooley25]

How about an harassement settlement against intuit for all of the mental strain they put us thru this past tax season. I almost went broke paying for fireball whiskey.