I received income from a lawsuit settlement & notice on 1099-MISC, why is the IRS coming back to me now & saying I need to pay self-employment tax and return my refund?

[awkytle]

I just received word from the IRS that I owe them over $4000 from my 2014 return that I filed through TurboTax. I received $30,000 on a 1099-MISC which was settlement payment on a breach of contract lawsuit with my former employer. My former employer entered in Box 7. I filled this out on TurboTax and was never directed to complete the Self-employment tax portion after checking it was from a lawsuit settlement. IRS is now saying that I need to pay the self-employment tax and return the refund I received. How can I remedy this situation? Why wasn't I informed when completing TurboTax and entering that information that I should do self-employment tax. Should I fight the IRS and provide information as to why I shouldn't pay this?

[TaxpayerA]

That didn't make sense.. When you enter the 1099 and ticked "lawsuit settlement" did you check whether your refund amount changed? Also what do you mean you were never directed to the self employment tax portion. 1099 IS a self employment tax form.. So by having one and entering it from my understanding you are declaring yourself as such. Most everyone knows 1099 is the basis of how freelance and self employment taxes are paid ..

[fanfare]

TurboTAX put your settlement on Line 21 Other Income. IRS is not buying it.

It's not clear who is correct. Sometimes IRS makes mistakes.

You can and should dispute the IRS change to your return.

you may  need a tax professional who knows his stuff to give you the answer..

[fanfare]

FYI. TaxACT, unlike turboTAX, makes no distinction for a lawsuit with Box 7 income.