All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

Posts: 1
Registered: ‎02-13-2018

Received 1099-MISC for full payout after settlement of Class action lawsuit

Back in 2009 I purchased house from a bank and found out that the bank didn't disclose a property tax refund check they received prior to escrow closing that I was entitled to part of it. Basically, they had to refund me about $1000 that they overcharged me. I was ignored by everyone and ended up suing them and became a class representative in a class action lawsuit. Finally in 2017 there was a settlement in which the bank agreed to pay about $250,000 total towards a settlement fund. The law firm received the 250K check in Jan 2017. The law firm got about $100K, there were some other fees, and admin costs of 40K, and I got a $3,500 as enhancement reward for being the class representative. I also got a $600 as my part of the fund for my share. That is I got $600 of the $1000 owed to me.
Last week I received in the mail a 1099-MISC with box 3 showing other income of $250,000.
If I just enter this 1099 into my tax return, it would yield more than $110,000 in tax liability...
Clearly the logical way is that I got $3,500+$600 - $1000 which is the basis here so about $3,100 as income. I totally ignore here the 8 years of lost interest on my $1000. Also, not sure how to quantify all my time spent, miles driven to depositions, etc as expenses incurred by me during this long process.
How do I enter this into my tax return without getting an IRS Audit, and all the hustle that would come with it.

Associate (Pioneer)
Posts: 31
Registered: ‎02-26-2018

Re: Received 1099-MISC for full payout after settlement of Class action lawsuit

Hi KobeBee,


As this is not a settlement for a nontaxable cause of action (e.g., personal injury, certain discrimination cases, or whistleblower suits) you need to report your income from this settlement. You should first try to get a replacement 1099-MISC that shows your distributive share of the $250,000 settlement instead of the entire amount. You distributive share may or may not include a portion of the attorneys fees as well. You may have received a statement from the law firm along with your 1099-MISC discussing the treatment and taxability of those fees. If not, you should contact them or a tax attorney to discuss what portion of those fees is taxable to you.


If you cannot get a replacement 1099-MISC, then you have two options for how to file it.


  1. EFILE AND WAIT: If you are using the online software, file the 1099-MISC as income in the topic for a 1099-MISC from a one-time event. If you are using the desktop version, then file it in the Miscellaneous Income topic. You cannot deduct the $1000 you were supposed to originally receive from your amount or the expenses you listed. So you will need to report the entire $3,500 + $600 as taxable (plus possibly your share of the attorneys fees). It is not possible to attach a statement explaining why you’re adjusting your box 3 amount to the correct amount, so you cannot explain this upfront. The IRS might then send you a letter asking you why you made the adjustment and you will have to send one back explaining that your 1099-MISC was for the full amount of the class-action settlement and that you are reporting only your taxable share.
  2. PAPER FILE WITH AN EXPLANATION: Follow the above steps, but instead of efiling, print your return out and attach the explanation for what you’re doing to your 1040 to circumvent the IRS’s potential questioning of this.


You can get more information on the tax code’s treatment of lawsuit settlements here: 



Tax Research Specialist