If a civil case forces you to return prior income, can you adjust your previous tax returns?

Say my business make 100k this year. And next year, a civil suit claims that income was an ill-gotten gain, and I have to settle and return the 100k I made.





Can I go back and amend my prior year's tax return and get a refund for the taxes I paid on my 100k income, since that income is now 0? Or do I claim a loss on the present year income, because that would be catostrophic given that I cannot recover the taxes paid.If a civil case forces you to return prior income, can you adjust your previous tax returns?
If you properly reported the income in a prior year, and it was determined that the income was paid to you in error, you may be able to recover the taxes paid on the repaid income by filing a ';claim of right'; to recover taxes paid on income you had to repay.





Whether this will work for you depends on the circumstances of your repayment. Damages you had to pay to settle a lawsuit may not be considered repayment. The suit has to say that you are repaying the income.





The claim of right is filed using Form 1045, Line 28, and attaching the necessary computation and documentation. Form 1045 can be filed by itself, or can be attached to your income tax return for the tax year in which the income was repaid.





Consider filing Form 1045 by itself, since that will require a prompt response regarding your refund.





http://www.irs.gov/pub/irs-pdf/f1045.pdf