Contract question and taxes

[Doctor J]

Hi all,

Just wondering if anyone has had any previous experience with this issue.

A broken contract that has 'Golden Handcuffs' in it - I.e. Signing bonus or other bonus money that immediately becomes repayable in case of broken contract.

Say Doctor Indebted signed a contract in 2010 for 10 years and breaks his contract due to personal reasons. The money paid in years 2010, 2011, 2012 and so on immediately become repayable as a loan over a set period of time. However that signing bonus money (and whatever other bonus money is now repayable) had income tax (and FICA and Medicare etc) withheld during the years in which it was paid. How does Doctor Indebted recoup the income tax that was withheld?

If your answer is 're-file the appropriate years with corrected W-2's', this is not possible as the former employer is not willing to issue corrected W-2s.

Someone out there has to have encountered this in their personal experiences. I'm thinking there may be a way to deduct the amount repaid from THIS years income, but I'm not sure how. Even a CPA has been stumped with this.

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[USCDiver]

Why would you expect to be able to recoup those taxes? That was money you earned (and spent) in those tax years. Your new loan is connected only by the nature of the contract and should have little or no bearing on your tax liability in previous years.

 

[Doctor J]

Why would you expect to be able to recoup those taxes? That was money you earned (and spent) in those tax years. Your new loan is connected only by the nature of the contract and should have little or no bearing on your tax liability in previous years.

Contractually, it's no longer income. That's why.

So you haven't encountered this personally?

 

[VA Hopeful Dr]

Find a good accountant?

 

[BoardingDoc]

If your answer is 're-file the appropriate years with corrected W-2's', this is not possible as the former employer is not willing to issue corrected W-2s.

In these instances you notify the IRS to have them contact your employer directly to make the appropriate adjustments. You can also fill out a form 4852. https://www.irs.gov/pub/irs-pdf/f4852.pdf

 

[USCDiver]

Contractually, it's no longer income. That's why.

So you haven't encountered this personally?

I haven't encountered it personally, and I certainly don't claim to be an expert on this kind of stuff, but are you trying to argue that because of your contract, those funds weren't earned income but a loan even though at the time you weren't accruing interest and didn't consider it to be a loan? Good luck convincing the IRS of that!

 

[Doctor J]

I haven't encountered it personally, and I certainly don't claim to be an expert on this kind of stuff, but are you trying to argue that because of your contract, those funds weren't earned income but a loan even though at the time you weren't accruing interest and didn't consider it to be a loan? Good luck convincing the IRS of that!

It accrued interest from the moment the moneys were given. The income has been re-classified as a loan. Promissory note and interest and late payment penalties and all.

If you don't understand, just say so.

Thanks BoardingDoc. This is good information.

To answer anyone who is following this, I believe the correct way to go about it is re-filing the appropriate years with form 4852 and letters of explanation as well as supporting documentation (i.e., contract, promissory note of repayment, receipts).

 

[USCDiver]

It accrued interest from the moment the moneys were given. The income has been re-classified as a loan. Promissory note and interest and late payment penalties and all.

If you don't understand, just say so.

Yeah I didn't understand because what you wrote in the OP was "immediately became payable as a loan" which led me to believe the loan first appeared when you left the job and not when you took the job.

Good luck with your taxes!

 

[Doctor J]

So!

I was wrong.

In fact, I DEDUCT the amount repaid during the year I repay it as a miscellaneous itemized deduction. Covered under IRS publication 525 rules on repayment.