Attorney Filer of ADA Lawsuits Pleads Guilty to Filing False Tax Returns For Not Reporting Disability Lawsuit Settlement Income

November 29, 2022

A California attorney known for his filing of thousands of disability discrimination lawsuits under the Americans with Disabilities Act of 1990 (“ADA”) with himself as the plaintiff plead guilty November 29 to filing a false tax return on which he underreported the income he earned from many of those lawsuits. Aside from the enjoyment many businesses victimized by the defendant’s or other similar disability lawsuits may experience over seeing the defendant get his own comeuppance, the prosecution and the plea also provide important reminders for businesses paying ADA or other settlements to applicants or former employees.

According to court documents and statements made in court, Scott Norris Johnson owned and operated Disabled Access Prevents Injury Inc (DAPI), a legal services corporation. A quadriplegic and an attorney, Johnson filed more than 4,000 lawsuits in the Eastern District of California and elsewhere under the ADA and related California statutes, naming himself as the plaintiff against businesses he claimed were not in compliance with state and federal disability access laws first using DAPI, and later a law firm,

Under the Small Business Job Protection Act of 1996, payments related to lawsuit settlements or awards are taxable unless paid on account of personal physical injury or physical sickness. Johnson, who worked as an attorney at the Internal Revenue Service (“IRS”) earlier in his career, was required to report the taxable portion of the lawsuit settlements and awards he received. He nonetheless intentionally underreported this income on his 2012, 2013, and 2014 tax returns. By understating the lawsuit settlements and awards, Johnson and DAPI paid little to no income tax for tax years 2012, 2013 and 2014. Johnson caused a loss to the IRS of more than $250,000.

Johnson is scheduled to be sentenced on March 7, 2023, and faces a maximum penalty of three years in prison for filing a false tax return. He also faces also faces a period of supervised release, restitution, and monetary penalties. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

The prosecution and subsequent plea highlight the taxability of disability and certain other settlements and the willingness of the Justice Department and IRS to prosecute individuals and businesses failing to fulfill obligations to recognize and report those payments as income for federal tax purposes.

Businesses and their legal counsel entering into settlements or otherwise making payments to employees or applicants under the ADA or other taxable settlements generally should use care to properly report taxable amounts as income to the recipient. For payments made pursuant to a settlement agreement, the settlement agreement generally should provide both that the employer is authorized to deduct and withhold amounts the employer believes may be due from the employee for taxes as well as obligate the employee to report and pay any additional taxes due on the payment.

Obviously, the business also needs to ensure it properly reports and pays its required share of any employment taxes on the payments. Employees should confirm the current tax rules prior to making any agreement or payment to avoid mistakes.

Businesses also should keep in mind many other developments could impact the interpretation and enforcement of settlements and their resulting responsibilities. Changes to trade secret, noncompete, arbitration, voluntariness and other requirements for release of claims, arbitration, scope of release and other developments could materially affect the effectiveness of previously used settlement language. Wise business leaders will seek qualified legal advice and assistance with their settlements.

For Help With Comments, Investigations Or Other Needs

If your organization would like to learn more about the concerns discussed in this update or seeks assistance auditing, updating, administering or defending its human resources, compensation, benefits, corporate ethics and compliance practices, or other performance related concerns, please contact management attorney and consultant Cynthia Marcotte Stamer.

An attorney Board Certified in Labor & Employment Law by Texas Board of Legal Specialization, Ms. Stamer is recognized for work helping organizations management people, operations and risk as  a Fellow in the American College of Employee Benefit Counsel, a “Top Woman Lawyer,” “Top Rated Lawyer,” and “LEGAL LEADER™” in Labor and Employment Law and Health Care Law; a “Best Lawyers” in “Labor & Employment,” “Tax: ERISA & Employee Benefits,” “Health Care” and “Business and Commercial Law.”

For 35 years, Ms. Stamer’s work has focused on advising and assisting businesses and business leaders with these and other employment and other staffing, employee benefit, compensation, risk, performance and compliance management and other operational solutions and concerns. Her experience includes helping management both manage performance and manage legal risk and compliance.  While helping businesses define and manage the conduct and performance of their employees, contractors and vendors, she also assists employers and others about compliance with federal and state equal employment opportunity, compensation, health and other employee benefit, workplace safety, leave, and other labor and employment laws, advises and defends businesses against labor and employment, employee benefit, compensation, fraud and other regulatory compliance and other related audits, investigations and litigation, charges, audits, claims and investigations by the IRS, Department of Labor, Department of Justice, SEC,  Federal Trade Commission, HUD, HHS, DOD, Departments of Insurance, and other federal and state regulators. Ms. Stamer also speaks, coaches management and publishes extensively on these and other related matters. For additional information about Ms. Stamer and her experience or to access other publications by Ms. Stamer see hereor contact Ms. Stamer directly.

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