Imagine suing a credit bureau, winning a $64,750 settlement, and walking away with a tax bill bigger than your actual payout. That's not a hypothetical — it's what happened to a couple in a Tax Court decision handed down on July 14, 2026, and it exposes a trap that catches far more people than just plaintiffs in credit-reporting disputes.
The case is Eiler v. Commissioner (167 T.C. No. 3), and while the facts involve the Fair Credit Reporting Act (FCRA), the real lesson is about how the tax code treats legal settlements in general — and why any business owner who settles a lawsuit, or any employer who runs background checks on job applicants, should pay close attention.
What Happened in Eiler
The Eilers sued several credit reporting agencies under the FCRA, alleging the agencies kept reporting inaccurate information about them even after being notified of the errors. Their attorneys took the case on contingency. The parties eventually settled for $64,750 — but the law firms kept roughly $60,050 of it in fees, leaving the Eilers with just $4,700 in their pocket.
When tax time came, the Eilers didn't report the attorney's fees as income at all. Their theory: FCRA has a fee-shifting provision that lets a prevailing plaintiff recover attorney's fees from the defendant, so the fees were never really "their" income to begin with — they belonged to the law firm. Failing that, they argued the fees should at least be deductible "above the line" (i.e., before calculating adjusted gross income) because FCRA claims involve a form of "unlawful discrimination" under Internal Revenue Code Section 62(e)(18).
The IRS disagreed on both counts, assessed an $11,423 deficiency, and the case went to Tax Court.
Why the Court Sided With the IRS
On the income question, the court leaned on the Supreme Court's 2005 decision in Commissioner v. Banks, which established that when a plaintiff recovers money in litigation, the full amount — including the portion that goes straight to the attorney under a contingency arrangement — counts as the plaintiff's gross income. The theory is that the fee arrangement is effectively an "anticipatory assignment of income": the client earns the right to the settlement, and simply directs part of it to be paid to someone else (the lawyer). The FCRA's fee-shifting statute didn't save the Eilers here because the settlement was reached without any admission of liability, so the specific statutory fee-shifting mechanism never technically applied.
On the deduction question, the court had to decide whether an FCRA claim is a form of "unlawful discrimination" under Section 62(e)(18)(i), which covers violations of any federal, state, or local law "providing for the enforcement of civil rights." If it is, the attorney's fees can be deducted above the line, which matters enormously post-2018: the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions (the below-the-line route) through 2025, so above-the-line treatment is often the only way to avoid being taxed on money you never actually received.
The court said no. Using contemporaneous dictionary definitions and the surrounding statutory language, it held that "civil rights" evokes protections like equal protection, due process, and voting rights — not the accuracy of a credit file. It drew a specific contrast with the Equal Credit Opportunity Act (ECOA), a cousin statute that explicitly targets discrimination in lending, and found FCRA's accuracy-and-disclosure requirements to be a different animal entirely.
The bottom line: the Eilers owed tax on $60,050 they never saw, with no offsetting deduction — a deficiency of $11,423 against a net recovery of $4,700.
Why This Matters Beyond FCRA Plaintiffs
It's tempting to file this away as a niche consumer-law footnote, but two groups of readers should take it seriously.
If you settle any lawsuit as a business
The Banks assignment-of-income rule isn't specific to FCRA — it applies to essentially any contingent-fee litigation settlement. If your business is a plaintiff (say, a supplier dispute, a breach-of-contract claim, or an insurance bad-faith case) and your attorney works on contingency, the full settlement amount — attorney's fees included — generally lands in your gross income. Whether you get any offsetting deduction depends entirely on which narrow statutory category your claim falls into, and Eiler shows the courts are reading those categories tightly, not generously.
The practical takeaway for settlement drafting: get specific about how a settlement is allocated among different types of claims and damages before you sign. The Tax Court isn't bound by a taxpayer's unilateral characterization, but a well-drafted agreement — ideally one that both parties agree to and that tracks language actually used in the underlying complaint — is far more useful than silence. The Eilers' settlement agreement contained no allocation at all, which left them with no ammunition when the deduction question came up.
If your business runs background or credit checks on applicants or tenants
FCRA compliance isn't just a consumer-plaintiff issue — it's an active employer liability area. FCRA litigation volume has climbed sharply, and most of it isn't driven by malicious employers; it's driven by process failures: a disclosure form with one extra line of text, a background-check authorization bundled with other paperwork instead of standing alone, or a skipped step in the "adverse action" notice process before you decline to hire someone based on a report. Statutory damages run from $100 to $1,000 per violation, and because these are exactly the kind of formulaic, easy-to-prove violations that support class certification, individual mistakes can scale into six- and seven-figure exposure fast. A well-known recent example: a national retailer paid $600,000 to settle a class action that started with a single problematic line in a disclosure form.
Small businesses are not exempt. Any employer using a third-party background-check or credit-check vendor is covered by FCRA regardless of company size, and Eiler is a reminder that even the plaintiff's side of one of these cases carries an unexpected tax sting — which is exactly the kind of leverage a plaintiff's attorney will use in settlement negotiations. If you're an employer, the cheapest fix is upstream: a standalone, no-extra-content disclosure form; a clean written authorization; and a documented adverse-action process (pre-adverse notice, copy of the report, reasonable time to respond, then final notice) followed every single time.
The Deeper Tax Lesson: Settlement Windfalls Aren't Free
The pattern in Eiler shows up constantly in small-business tax situations that have nothing to do with FCRA: money that passes through your hands, even briefly or nominally, is often still your income for tax purposes — regardless of how quickly it moves back out the door. A contractor who collects a client's payment and immediately pays a subcontractor, a landlord who collects a security deposit that's contractually earmarked for repairs, or a business owner who wins a settlement earmarked mostly for legal fees can all end up with a tax bill that doesn't match what actually stayed in their bank account.
The fix isn't a tax-code workaround — it's bookkeeping discipline. If you know a settlement, refund, or pass-through payment is coming, model the gross amount as income and the fees or pass-through portion as a separate, clearly documented expense line as soon as the money moves, rather than netting the two together in your head and only recording the leftover cash. That habit is what makes it possible to tell your tax preparer exactly how a number was built when they ask — instead of discovering, like the Eilers did, that the IRS's version of gross income doesn't match your intuition about what you actually received.
Keep a Clear Record of Every Settlement Dollar
Litigation settlements, fee-shifting statutes, and above-the-line deductions are exactly the kind of transactions that get mangled when they're tracked in a spreadsheet after the fact instead of recorded as they happen. Beancount.io's plain-text accounting lets you log the gross settlement, the attorney's fee portion, and the net cash received as separate, auditable line items the moment the money moves — so when deduction questions like the one in Eiler come up, your books already have the answer. Get started for free and see why developers and finance-minded business owners are switching to plain-text accounting.