You've been injured in some type of accident, and you've got a legitimate personal injury case, but you've also got a less-than stellar relationship with the IRS and/or your state's tax agency. Maybe you haven't filed a tax return in a number of years, or perhaps you owe a sizable amount in back taxes. How will this affect your case?
Filing Taxes Versus Paying Taxes
When it comes to impact on your injury case (and as a general rule), it’s more important that you have actually paid the taxes you owe than it is to have filed a tax return. That's because most people work for someone else, and as employees they might have more taxes than they owe taken out of their pay, through various withholdings. That's why many people get refunds every spring, or at least come close to breaking even. But you will only get a refund if you file a tax return. So, as far as the IRS is concerned, if your tax withholding is more than you owe, and you don’t bother filing a tax return, that’s mostly your business, and they will be more than happy to keep your excess taxes.
But if you work for yourself, no one is taking taxes out of your pay, and you need to make quarterly tax payments and file a tax return every year so that the IRS can figure out how much you earned and how much you owe in the way of taxes. For this reason, self-employed people have to file tax returns because, unlike those who work for someone else, these returns will explain how much tax the self-employed filer owes.
Learn more about Income Tax.
If You're Making a Lost Earnings Claim
How does all this affect your personal injury claim? If you are making a claim for lost earnings, the best (and possibly only) way to prove what your earnings were is through your tax return. Sure, if you work for someone else, you theoretically could produce your paystubs or W-2 form from your employer, and maybe even get your employer to write you a letter stating what your income was, but that probably won’t be enough. Judges consistently rule that anyone making a lost earnings claim has to produce his/her income tax returns.
(Learn more about the different kinds of loss claims in a personal injury case: Personal Injury Damages FAQ.)
If you haven’t filed any tax returns, obviously that is a pretty good excuse for not producing them to the defense attorney as part of the discovery process, but your lack of any tax returns will be used against you even if you don’t owe any taxes. And if you are a self-employed person who hasn’t filed any tax returns, that will really be used against you, because a self-employed person who hasn’t filed tax returns is more likely than not a person who has failed to pay all the taxes that he or she owes.
Juries don’t look favorable on plaintiffs who don’t pay their taxes, or who don’t file tax returns. A juror might think, "Well, we all have filed our tax returns and we all have paid our taxes, so the plaintiff should too." The bottom line is that if you are making a lost earnings claim and you haven’t filed your tax returns, that is going to hurt your lost earnings claim.
So, what should you do if you do have a lost earnings claim and you haven’t filed tax returns? If you have a significant lost earnings claim, your attorney will probably recommend that you just tough it out. Make the lost earnings claim, admit that you haven’t filed tax returns, and get them filed ASAP.
But if you have a pretty small lost earnings claim, you might seriously want to consider just waiving it so that you can avoid the issue of whether you filed tax returns or not. It might not be worth the hassle.
If you aren’t claiming lost earnings as part of your damages, then you have no reason to produce your tax returns. The defense attorney will undoubtedly still request your returns, but your lawyer should object to that request on the grounds that it the returns are irrelevant.
More on taxes and personal injury claims: Is My Personal Injury Settlement Taxable?