Help! I've been dealing with an IRS mess for the past six months. Specifically, I sued a quasi-governmental agency in CA for their failure to provide me with voc rehab services related to a disability (I was on permanent disability). The agency refused to provide services, as required under CA law, and I spent years fighting to get help. I eventually was accepted into a graduate program at a state school where I earned a terminal degree. The agency refused to respond to me or provide services throughout that time. I eventually sued and won a relatively small amount ($7,000), of which nearly $3,000 went to pay for legal expenses for tuition reimbursement (I still have more than $100K in student loans) and have since moved across the country where I am gainfully employed.

My 2014 taxes were filed in time (Feb 2015) but I hadn't received any info regarding my settlement (I didn't even think about it as I didn't know that money may be taxable). Later, I received TWO 1099-MISCs. One from the agency for $7,000 and a second one for the amount I received from my attorney (approx. $4,000) - the agency had sent the proceeds to my attorney and she, in turn, deducted her fees and sent me the 1099-MISC for the remaining amount). During this time, I also moved across the country and forgot all about this.

Last December (2016), I received a letter from the IRS stating I owed several thousand dollars on more than $11,000 (the IRS added the two 1099_MISC together)! It was clear I was being taxed on the same money twice. I contacted the attorney and she realized that she should NOT have sent me a 1099-MISC and fixed that problem by filing an amended 1099_MISC for $0 with the IRS. On the other hand, the person who did my taxes in CA had retired and left me rather high and dry to deal with the rest.

The problem I'm having now is whether or not the money is taxable. The state agency listed the settlement as non-employee compensation and the IRS, at the moment, is claiming that it's because I was a self-employed contractor (clearly, it is not - I was never employed by or for the state agency - which is a HUGE pension/retirement system). I contacted the IRS directly and was first told that the lawsuit proceeds were NOT taxable and that I should complete a Form SS-8. As with all things IRS, the form is nearly incomprehensible and doesn't make a lot of sense. I contacted the IRS for help on completing the form and this time, was subjected to extremely abusive treatment by a different IRS employee. I tried to contact the IRS ombudsman but they wouldn't help so I contacted my congressman's office. The congressman and his staff have been VERY helpful and is now serving as the go-between.

The question remains, is the settlement, for tuition reimbursement taxable? If not, what do I do? The IRS can't provide my congressman with an answer, my congressman doesn't know, and my current tax person is also confused. I just want this matter settled but I don't want to pay more than I have to. FYI, as part of this who mess, I just discovered, last week, that the IRS FAILED to credit me for money I had paid them when I filed my 2014 taxes - NO ONE caught that except for me. Ugh!

Thanks for the help.