Persons who have been seriously injured in a car accident or some other injury caused by the negligence of others are entitled to three types of financial damages:
- The cost of past and future medical care.
- Past and future loss of income.
- Past and future pain and suffering.
Demonstrating lost income necessarily involves producing past tax records of the injured person. Someone who has been catastrophically injured in an accident may have lost 20 or more years in the workforce. This is a devastating lost to both the injured person and his (or her) family. In many personal injury cases, this is the largest item of damages to be awarded by the jury, and the component of the damage award that is most likely to “make the person whole.”
A person who has been consistently earning $50,000 per year, and whose injury has reduced his earning capacity to $25,000 per year, would be entitled to $500,000 in damages, assuming a 20 year future work life.
But what if this person has been cheating on his federal tax return, and has only reported $25,000 per year? Before answering this question, let me explain what I mean by ‘cheating’.
As a lawyer I am not talking about grey areas like whether to deduct the bill for an expensive dinner with a good friend who also happens to be a business competitor. Your tax preparer is certainly allowed to resolve grey areas in your favor in preparing your taxes. These types of issues will not to interfere with a personal injury claim, even if an IRS audit rules that the cost of the dinner was not deductible.
No, I’m talking about a situation such as a small business only reporting check and credit charge income, and omitting cash revenue when reporting income. If a business has been netting $50,000 per year but only reporting $25,000 a year, the injured person now has two choices.
- He can accept the fact that years of tax cheating has greatly diminished his personal injury claim, and he now will only collect monetary damages for medical bills and pain and suffering.
- He can apply to the IRS to amend his past tax returns to conform to the true amount of income earned during past years. The problem with this approach is that it will subject him to huge fines and penalties and possibly jail. Moreover, the jury in the personal injury trial will learn that this person has cheated on his taxes.
As you can see, either scenario is unpleasant. So, as the saying goes, “honesty is the best policy,” and this axiom applies when filing our income tax returns.