Can the IRS audit my personal injury settlement?

Can the IRS audit my personal injury settlement?

Yes. While compensatory personal injury settlements are excluded from income, the IRS may audit your return to verify the nature of the settlement proceeds, particularly if you received a 1099. Keeping your settlement agreement, medical records, and correspondence from your attorney is important. In practice, properly documented physical injury settlements rarely draw IRS scrutiny, but having experienced counsel draft your settlement agreement correctly is the best protection.