IRS Can Collect Taxes on Unused Sick Leave and Vacation Time

An employee who resigned received a lump sum payment equivalent to unused vacation time and sick leave credits. But in his IRS tax return for that year, the resigned employee did not include the leave payments as part of gross compensation and was later assessed deficiency income taxes by the IRS. The taxpayer raised the issue before the US tax court, claiming that the leave payments were in the nature of workmen’s compensation for injuries while at work.

Tax Court Ruling

The US Tax Court ruled that the leave payments are not considered as compensation for personal injuries or sickness and are not excluded in the computation of gross income.

Gross Compensation

In computing for income taxes, an accurate determination of the taxpayer’s gross income is absolutely important. The US Tax Code defines gross compensation as “all income from whatever source derived, including but not limited to, compensation for services.” The tax court has ruled in previous cases that payments received for accrued and unused vacation and sick leave are treated as compensation for services and form part of gross income.

The law defining gross compensation excludes ‘amounts received under workmen’s compensation acts as compensation for personal injuries or sickness’.

The taxpayer in the case earlier mentioned relied on this provision, but was not sustained by the tax court.

The US tax code requires taxpayers to pay correct income taxes on time. Failure to include certain amounts as gross compensation can lead to an IRS notice of deficiency income taxes which require the prompt payment of the deficiency tax as well as applicable penalties and surcharges. If the assessed taxes remain unpaid, the IRS may collect through a levy or garnishment.

If you receive a notice of deficiency or levy/garnishment, you may be entitled to taxpayer rights and remedies under the Tax code. Contact your IRS tax attorney immediately in order to protect your property and valuable assets.

In Tyler and East Texas, the law firm of Scott Scammahorn has been helping clients for more than 16 years, representing them before the IRS and availing of appropriate taxpayer remedies such as Offer in Compromise or Installment Agreement, innocent spouse relief, and payment plans.

We welcome your call at (903) 595-1000 to speak to an attorney about your IRS problem.