What do I do since I was unaware that I had to claim lawyer contingency fee as income in 2004? 4 Answers as of November 27, 2012

My med mal lawsuit was settled in Mar. 2004. This is several mo. before IRS law was changed. Neither atty nor CPA told me that I had to claim lawyer contingency fee as income and pay taxes on amt greater than 2% of AGI. I did not know this until yesterday while researching something else on web. I have emailed both atty and CPA. Is my info correct? Did I read this correctly on web? Will I go to prison. I do NOT have the funds to pay the taxes on atty's fee with the heavy penalties/interest placed by IRS. If I turn myself in, will I go to Tax Court and then to Prison. Please advise. I am disturbed by this and this info has ruined my entire holiday weekend.

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Mankus & Marchan, LTD
Mankus & Marchan, LTD | Tony Mankus
This area of tax law has evolved in the last 5 or 10 years. The general rule seems to be that if your award from the med malpractice law suit was based on a physical injury, it should not be taxable as income. If it was a non-physical injury (such as psychological injury, for example) the award is taxable as income, including the attorney's contingency fee. However, you should consult with a good tax attorney.
Answer Applies to: Illinois
Replied: 1/8/2011
E. Ray Critchett, LLC
E. Ray Critchett, LLC | Ray Critchett
I would highly recommend scheduling an appointment with an accountant and/or a tax attorney to discuss your concerns in further detail. I believe that a hour conversation will ease your fears greatly. You may contact our office to schedule an appointment if you have further questions or if you need assistance with this issue. You can also schedule an appointment or obtain additional information at our website.
Answer Applies to: Ohio
Replied: 11/27/2012
Givner & Kaye
Givner & Kaye | Bruce Givner
If you, in good faith, felt that you filed your returns correctly at the time, and you now find out that you filed them incorrectly, you are not under an obligation to file an amended return. The IRS has 6 years to audit a return when there is a 25% or greater omission of gross income.

Of course, you should file an amended return under the guidance of a competent CPA. That is your duty as a taxpayer. Filing now should allow you to claim reasonable cause and good faith to avoid a large penalty, which you may be unable to avoid if the IRS audits you between now and the end of the 6 year statute of limitations. However, you will not go to prison.

If you do not have the funds to pay the taxes you can work out a payment plan with the IRS. The IRS, despite all the crazy advertising on the radio, is actually quite a reasonable agency with which to deal, if you deal fairly with the IRS and come forward and try to do the right thing.
Answer Applies to: California
Replied: 1/3/2011
LT Pepper Law
LT Pepper Law | Luke T. Pepper
It is likely you can see a settlement with the IRS arguing you relied on a poor advice. It is unlikely you will go to prison. Best approach is to talk to a seasoned tax professional who can guide you on how to handle it.
Answer Applies to: Pennsylvania
Replied: 1/3/2011
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