You do not usually get a 1099-NEC or 1099-MISC for a non-taxable Legal Settlement. Why did you get the money and why do you think it's not taxable.
That said, If you received an erroneous 1099-Misc or 1099-NEC, you have several choices:
- Ideally, you get a corrected 1099-NEC from the payer
- Don't report it on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
- Report the Income on schedule C and take a deduction under other expenses, call it something like "nominee recipient adjustment"
- Report the income as misc line 8, Schedule 1 income (enter in TurboTax at the 1099-NEC screen) . Then enter a line 8 deduction, for the same amount. In TurboTax (TT), enter at:
- Federal Taxes tab
- Wages & Income
Scroll down to:
-Less Common Income
-Misc Income, 1099-A, 1099-C
- On the next screen, choose – Other reportable income - Answer yes to Any other Taxable Income -On the next screen, Enter the number with a minus sign (-) in front. Briefly explain at description.
- Do nothing and hope you can explain it away when & if the IRS contacts you
- If you disagree with a Form 1099, W-2, Schedule K-1, etc., you can use IRS Form 8275, Disclosure Statement A copy of the form is here: http://www.irs.gov/pub/irs-pdf/f8275.pdf .
