Earlier this year I left my job due to discrimination I faced which resulted in physical injury. My separation from the firm was pursuant to a settlement agreement--we agreed to go our separate ways and I was paid a sum of money. In the complaint I drafted that sparked the settlement discussions and my eventual separation from the firm, I argued that not only was I the victim of discrimination, but also that I suffered damages "on account of physical injury." I therefore wanted the settlement amount to be given to me on an untaxed and non-taxable basis (pursuant to Section 104(a)(2) of the IRC). At my employer's request, I provided a letter from my physician describing how the conduct of my employer resulted in physical injury. Moreover, at that time, I contacted the IRS via its hotline and confirmed that the injury that I complained of was of the type contemplated by IRC 104(a)(2).
In the end, because my employer wanted to avoid any exposure that might arise from an IRS review of the payments being made to me, when they paid the settlement amount they would only agree to give me a non-taxed sum of about 40% or so of the total, and they taxed the balance of the settlement award as if they were paying me for lost wages. We specifically agreed, however, that the language of the settlement agreement would not state the basis of the taxed and non-taxed portions of the settlement award, mainly because this is exactly what the IRS would review in trying to determine if the amount was taxable. So, with respect to portion from which they took taxes
, the agreements states "[employer will pay X] for settlement of [my] claim," and that I would "receive a W-2 form reflecting this payment." With respect to the non-taxed portion, the agreement says, "[employer will pay Y] for settlement of [my] claims of compensatory damages" and that I will receive a Form 1099 reflecting that payment.
Of course, my position is that I complained of and was compensated for "physical injury" that my employer caused me. However, as noted above, taxes were already taken out and paid to the government for part of the settlement amount. Finally, then, here's my question: When I file my 2012 tax return, how do I go about getting back from the government the taxes that my employer paid on my behalf pursuant to the settlement? Is there a particular tax form that I would complete that essentially says that I, through my employer, overpaid taxes (because I was paid a lump sum pursuant to a settlement agreement to compensate me for physical injury--which is not taxable income
I realize that in seeking a refund in these circumstances (and for an amount here in excess of $100K), that there is a good chance that I'd be audited, but at that time (or any time) I would be able and willing to provide the supporting materials alluded to above.
I guess in the end this is a procedural question of sorts (i.e., what forms to use and/or how I would go about getting a refund in these circumstances), but any insight anyone could give me on any aspect of this situation would be greatly appreciated. The tax professional I'm currently working with wrongly continues to view the amount of the settlement that was taxed as wages, although (1) the settlement was neither sought nor obtained to recompense me for lost wages, (2) the parties deliberately removed referenced to "what the payments were for" from the language of the settlement agreement itself because it was known that I would approach the IRS on my own to seek a tax refund; and (3) the payment was in fact to compensate me for physical injury, injury that the employer required me to prove with evidence from my doctor, as a prerequisite to settlement.
Thanks in advance for your help.