Overview

The media has filled the airwaves with stories of sexual harassment and abuse in every corner of American Society. The media itself has been the perpetrator of many of these claims. On average, there are 463,634 victims (age 12 or older) of rape and sexual assault each year in the United States. The level of employer-based sexual harassment claims is significant and in the news these days. Here is a brief listing of some of the largest settlements:

1) USA Gymnastics v. Larry Nassar - USA Gymnastics agreed to pay $380 million to multiple women and girls involved in USA gymnastics.

2) Lucy Chi et al v. USC – USC agreed to pay 1.1 billion to a plaintiff’s class of 17,000 women who were all the victims of Dr. Tyndall.

3) Ashley Alford v. Aaron’s Rents Inc. – The plaintiff received a $95 million judgment in federal court of sexual harassment on the job.

4) Church-based – A number of churches have paid in excess of $3 billion in settlements for sexual abuse and harassment claims as of 2022.

The problem with settlement damages for sexual harassment and sexual abuse is the tax treatment of these settlements. Most of the settlements were finalized in a manner so that most of the payments were treated as taxable income for federal and state income tax purposes. Generally, settlements that provide compensation for injuries or sickness receive tax-free treatment under IRC Sec 104. This blog offers the possibility that plaintiffs should consider filing for a tax refund and receive a refund of taxes that were previously withheld from the settlement. The author has had success with the refund process in this scenario.

IRC Sec 6511 allows taxpayers to claim a refund of taxes paid within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. IRC Sec 6511(h) makes an exception to the 3-year/2-year rules above for those taxpayers who are unable to file their claim for refund due to “financial disability” by tolling the statute from running. The burden is on the taxpayer to prove they were unable to manage their financial affairs due to a medical issue going on, but if they can, those refunds more than three years old may still be obtained. The tax refund process is generally done by either filing an amended tax return to claim the refund (1040-X) or a Request for refund or Abatement (Form 843).

If you have received a settlement for sexual harassment or sexual abuse, you should consider filing a tax refund at the federal and state level for your injuries. Considering the tax rates for ordinary income, the amount of tax withholding could easily have been 30-50 percent of the settlement. While the settlement represents justice to the plaintiff, the amount of taxation does not.

A plaintiff of a sexual harassment or sexual abuse settlement has nothing to lose in pursuing a tax refund for some or all the taxes withheld on settlement payments even if the refund is more than three years after payment of the settlement.

Best Regards,