I received a restitution payment based on a court order from the State of California Victims of Corporate Fraud Compensation Fund. The payment was based on a criminal restitution order. Is this money taxable by the IRS or by the State of California? I have received no 1099G or any other documents indicating that the money is taxable. If it is taxable, how do I show it on my tax forms?
You are responsible to report all taxable income regardless of whether you receive a form, but it is the forms the IRS checks using their computers.
Restitution payment can mean different things, but if you are being reimbursed for something you lost and you never reported the loss as a tax deduction, then the restitution may not be income but rather reimbursement (not taxable.)
This might be something worth consulting a professional about, especially if the amount is large.
Thanks for your help. The payment was rather significant, and the loss was never reported as a tax deduction so it is probably in that gray area where a tax professional would be helpful. As a side, the State of California has been no help at all in determining whether there are tax consequences involved.
VIPR01,
Did you ever get advice from a tax pro on this issue? If so what was their advice? Thanks!
In general, the proper tax treatment of a recovery or payment from a settlement or judgment is determined by the origin of the claim. In applying the origin-of-the-claim test, some courts have asked the question "In lieu of what were the damages awarded?" to determine the proper characterization (see, e.g., Raytheon Prod. Corp., 144 F.2d 110 (1st Cir. 1944)).
For a recipient of a settlement amount, the origin-of-the-claim test determines whether the payment is taxable or nontaxable and, if taxable, whether ordinary or capital gain treatment is appropriate. In general, damages received as a result of a settlement or judgment are taxable to the recipient. However, certain damages may be excludable from income if they represent, for example, gifts or inheritances, payment for personal physical injuries, certain disaster relief payments, amounts for which the taxpayer previously received no tax benefit, cost reimbursements, recovery of capital, or purchase price adjustments. Damages generally are taxable as ordinary income if the payment relates to a claim for lost profits, but they may be characterized as capital gain (to the extent the damages exceed basis) if the underlying claim is for damage to a capital asset.
however, any interest payment included in the restitution would be taxable.