Yes, the IRS will require that you include a personal injury settlement or any kind of law suit judgment as an asset and pay that to the government to retire the taxes.  Thus an Offer in Compromise must be increased by the amount of the settlement.  Our exemption statute

 

 

protects a personal injury settlement from seizure or judgment, but this does not help for an Offer.  In other words, the IRS cannot forcibly take an injury settlement to pay those back taxes.  However, the IRS takes the position that the Offer program is voluntary and if one asks the IRS to accept less than he owes in full payment, he should “voluntarily” pay all assets available to him, with some exceptions, even those that are exempt from forced collection.  Let me hasten to add that one should not give up hope though.  There is another kind of Offer that can be pursued under certain circumstances.  I will discuss the possible solution to this dilemma in my next blog.