Yes, the failure to files taxes can certainly affect your personal injury claim.
First, the failure to file taxes can affect the ability to pursue a claim for lost wages. This is especially true if you are self-employed, are an independent contractor, or have a payment arrangement that is not paid simply hourly or by salary. This is also especially true if your claim ends up in a lawsuit.
While it seems harsh and punitive, when you are in an accident, even though you are not at fault, the law says you have the burden of proving your injuries and other damages, such as wage loss. Wage loss tends to be the most difficult area of damages to prove, probably because the best way to prove it is through documentation, which can be hard to obtain. People move on from jobs frequently, documents aren’t kept or are misplaced, and some jobs have several categories of compensation which may be difficult to track. Insurance companies won’t pay for lost wages unless they have documentation that clearly demonstrates the losses. They will not just take your word for it that you missed “X” amount of work at “Y” amount per hour. There must be back-up documentation to support the claim.
If you are not able to obtain documentation from your employer substantiating your missed time and wages, one of the other ways to prove loss of income is through tax returns. Losses can be shown by comparing income from year to year, by comparing the income in the year of the accident to the preceding years’ income. If you have not filed tax returns, that avenue of proving losses turns into a dead end.
Moreover, if you haven’t filed or paid taxes, and tax returns would have been the only way to prove your lost wages, it is probable that we will not be able to present a wage loss claim on your behalf. The failure to pay income taxes may be a criminal offense, and in a personal injury lawsuit, that information could become public record. That is not the kind of information we want to pass along to insurance companies or to the public, who can potentially access court records as public records, as you could be subject to prosecution.
Additionally, a jury is not likely to be sympathetic to someone who has not filed or paid their taxes. It is difficult for a juror to award lost wages knowing the person seeking damages has not paid his or her fair share of taxes, particularly because the vehicle through which one seeks to recoup lost wages, a lawsuit in the court system, is in large part funded by and operated with taxpayer dollars. It greatly damages a plaintiff’s credibility to assert a wage loss claim in front of a jury when taxes should be paid but aren’t.
Not only can the failure to file or pay income taxes affect your ability to assert a wage loss claim and your credibility, it can also affect your ability to receive settlement funds. If the IRS was to assert a lien against a claimant for failure to pay taxes, and the IRS were to learn about the claimant’s personal injury settlement, they could levy on the claimant’s lawyers, and potentially have a right to those settlement funds before the claimant gets paid. So a claimant could assert a claim, and settle it with the expectation of receiving money, and not see a dime because it could all have to be paid to the government to fulfill the outstanding debt.
In sum, if you haven’t paid your taxes or filed tax returns and you should have, it is probably best not to pursue a wage loss claim. If your attorney has a conversation with you about this and recommends not asserting a wage loss claim, please don’t be frustrated with the attorney. The attorney is really, ultimately, looking out for your best interests.