One of the primary reasons to reject a settlement confidentiality agreement is the potential tax implications. Generally, the amount you receive to compensate for personal physical injuries or physical illnesses is not taxable.
IRS Publication 4345 (Rev. 11-2021) states that this compensation should not be included in your income when filing your tax return. So, the payment for a personal injury claim should come to you tax-free.
However, when the settlement has a confidentiality clause, some of your personal injury compensation will be taxed.
The IRS’s position on NDAs is that the defendant is paying you a certain portion of the settlement money not to disclose the agreement.
Therefore, the IRS requires you to pay taxes on the amount they believe you received in exchange for confidentiality.
A good personal injury attorney will always make sure that any tax implications are minimized when a confidentiality clause is required.