If the workmans comp was not taxable then the lump sum is also not taxable ... you just got one final amount so the insurance company can stop making monthly payments which could continue for years. By accepting the lump sum you let them off the hook for future payments ... this most likely will not be in your favor in most cases which is why the ins companies like to do it... they dangle a large sum in front of you and you grab it however this is to cover all future medical expenses that you are now on the hook for.
Read the IRS pub starting on page 19 : https://www.irs.gov/pub/irs-pdf/p525.pdf
Other compensation.
Many other amounts you receive as compensation for sickness or injury aren't taxable. These include the following amounts.
• Compensatory damages you receive for physical injury or physical sickness,
whether paid in a lump sum or in periodic payments.
