A relative received a modest settlement. The judge who worked on the case gave a letter to him, and the letter was careful to specify that the settlement was for a physical injury. The IRS does not tax settlements for physical injuries.
He was told he will not receive any tax documentation for this settlement. He plans to not include it in his 2019 tax returns. From my limited understanding, having gone over some IRS rules, this seems all up-and-up. The question is, how does the IRS know not to come after him for taxes on this settlement? Who tells the IRS which settlements are to be taxed? Presumably no one. So will the IRS typically contact the person who received the settlement, and request evidence?