The IRS Is Always The Biggest Winner In Many Lawsuits

As a tax attorney, I’m always somewhat amused when big companies are taken to task and sued by employees and lose the case. They are ordered to pay enormous sums of money as a result. The most recent example is Tesla, in which a San Francisco jury ruled that Tesla must pay $137 million in a workplace race case. But how much of that will the plaintiff see after the lawyers and the IRS get their share? I’ll tell you, it won’t be anywhere close to that enormous sum!

Here’s the scenario as reported in “The jury awarded the plaintiff $6.9M in compensatory emotional distress damages, and a whopping $130M in punitive damages. The verdict may be appealed, but even if it stands up, taxes will slash the award because of how the IRS taxes legal settlements and judgments. Many plaintiffs win or settle a lawsuit only to be surprised that they have to pay taxes. Some don’t realize it until tax time the following year when IRS Forms 1099 arrive in the mail. In fact, under the 2018 tax “reform” law, many plaintiffs are even taxed on their attorney fees too, even if their lawyer takes 40% off the top. In a $100,000 case, that means paying tax on $100,000, even if $40,000 goes to the lawyer.”

The Tesla case is not cut and dry by any stretch of the imagination, but the fact of the matter is, the plaintiff who suffers the most will end up with the shortest end of the stick. The plaintiff will have to pay taxes on the attorney’s fees too. In the end the IRS, who had nothing to do with the case will definitely be the big winner! Remember, taxes are levied on monies that you “win” in any situation from Vegas to lawsuits.

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