In 2016, our client and her family ate at Moe's Restaurant. More than halfway through eating a salad, she bit into "non-salad items with blood". She was immediately hospitalized for bacterial food borne intoxication.  She had previous exposure to potentially life-threatening bacteria and diseases.  Fortunately, she survived and did not require major surgery. 

 

On a continuing basis, she was monitored by medical professionals.  Her residual issues included endocrine, nutritional and metabolic disease as well as vitamin deficiencies.  There were many secondary effects, including inability to eat, inability to sleep, weight loss and anhedonia (low energy and motivation). She was treated by a licensed psychologist.

 

She filed a claim with Moe's Restaurant.  While a lawsuit was not filed, the parties mediated the matter and reached a confidential settlement.  She received $5,900,000 in 2017.  The settled claim was for ingesting contaminated food at the Moe's and all resulting physical medical issues.  Restaurant issued a Form 1099-MISC for the payment.

 

She timely filed her 2017 Form 1040.  It was prepared by Associated CPAs PLLC in Durand, MI.  The return included a statement disclosing the 1099 amount as "non-taxable due to personal injury." (actual quote)

 

On December 17, 2018, the IRS issued Notice CP 2501 claiming the return did not match documents received from Form 1099 payors and she was subject to penalties. Her accountant timely responded, reconfirming the 1099 income was properly disclosed and reported as a non-taxable settlement from personal injury.

 

On April 15, 2019, the IRS issued the attached Notice CP 2000.  Prepare the legal analysis portion of our response. Identify the applicable law and relate it to our client's facts.  A well-written analysis will generate:

 

1.  the IRS' July 8, 2019 Notice CP2005 closing the inquiry with no change to her 2017 return, and

2. a very happy client.

 

            All relevant authority is listed.  No research is needed other than finding and reading these sources.  use citation in your response.

Answer rating: 100% (QA)

Legal Analysis The legal issue at hand revolves around the tax treatment of the settlement amount received by the client in 2017 in connection with a ... View the full answer