How long does the IRS typically take to send a letter about unreported income after receiving a 1099-MISC?

The IRS generally sends CP2000 notices (the automated underreporting notices) within 1-2 years after you file. Since you're talking about 2022 taxes that were presumably filed in 2023, you might receive something in 2024 or early 2025. But don't panic! The IRS computer system automatically flags mismatches between reported 1099s and tax returns, but that doesn't mean you've done anything wrong. If you get a notice, you'll have the opportunity to explain that the settlement was non-taxable income. Your new CPA is correct though - the best practice is to report even non-taxable income on your return and then show the adjustment that brings the taxable amount to zero. This prevents the automated system from flagging the discrepancy in the first place.

I had a similar issue last year with a 1099-MISC for a non-taxable insurance settlement. I spent hours trying to figure this out myself before discovering https://taxr.ai which totally changed my approach. I uploaded my 1099 and settlement documents, and it immediately identified where my specific type of settlement fell under tax law. The service even generated personalized documentation explaining exactly why my settlement wasn't taxable (with relevant tax code citations) that I could keep on file in case of audit. Super helpful since the IRS computers just see the 1099 without understanding the context behind it.

Wanted to follow up on this! I ended up checking out taxr.ai after my last comment because I had a similar unreported income issue from a canceled debt 1099-C. It was actually really helpful! I uploaded my documents and within minutes had a clear explanation about how my situation should be handled (turns out my canceled debt qualified as non-taxable under insolvency rules). What I really liked was getting those specific tax code references that explained why my situation was an exception. Made me feel much more confident about how to handle things if the IRS does question it. Thanks for recommending this - saved me a ton of stress!

If you do get a letter from the IRS, be prepared to wait FOREVER to get through to someone on the phone. I went through this nightmare last year with a similar notice. Spent literally 3+ hours on hold multiple times, got disconnected twice, and finally gave up trying to call them directly. After weeks of frustration, I found https://claimyr.com which is this service that somehow gets you through the IRS phone queue. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. They called me back when they had an IRS agent on the line, which saved me hours of hold time. Explained my situation about non-taxable income to the agent and got it resolved in one call.

I have to admit I was wrong about Claimyr. After my skeptical comment, I decided to try it when I got a CP2000 notice myself about some stock sales the IRS thought I didn't report correctly. Instead of wasting another day on hold, I used the service and got connected to an IRS rep in about 45 minutes (while I was just going about my day). The agent was able to pull up my account and confirmed they'd send me a corrected notice after I explained the situation. No more notice anxiety hanging over my head! For anyone dealing with these unreported income letters, being able to actually talk to someone at the IRS makes a huge difference.

I worked at the IRS before retiring (not speaking officially). From my experience, I can tell you CP2000 automated notices for document mismatches typically go out 1-2 years after filing. For 2022 returns, that would be sometime in 2024 or early 2025. One thing to consider: even if income is non-taxable, failing to report it when a 1099 was issued creates unnecessary work for both you and the IRS. It's always better to report it and then show the adjustment with an explanation, like on Line 8z of the 1040 (Other Income) and then a negative adjustment with description.

Just want to mention that different types of settlements are treated differently for tax purposes. Personal injury settlements are generally not taxable. But settlements for emotional distress, punitive damages, or lost wages usually are taxable. Make sure you know which category yours falls into before assuming it's non-taxable.

I know this doesn't answer your question directly, but if you're worried, you should gather all your documentation now so you're prepared if/when you do get a letter. Get a copy of the settlement agreement showing it was for personal injury, the 1099-MISC the law firm issued, and maybe even a written statement from either CPA explaining why it wasn't taxable. The IRS usually gives you 30 days to respond to a CP2000 notice, which can feel really rushed if you're scrambling to find paperwork from 2-3 years ago!

Great advice from everyone here! Just to add another perspective - I went through something similar with a workers' comp settlement in 2021. The IRS sent me a CP2000 notice about 16 months after I filed, even though workers' comp settlements are clearly non-taxable under IRC Section 104(a)(1). What really helped me was having everything organized beforehand like Ethan suggested. I had copies of the settlement agreement, the court order approving it, and a letter from my attorney explaining the tax treatment. When the notice came, I was able to respond within a week with all the supporting documentation. The key thing I learned is that the IRS automated matching system doesn't distinguish between taxable and non-taxable income reported on 1099s - it just sees a mismatch and generates a notice. But once you provide the proper documentation showing why the income isn't taxable, they usually close the case pretty quickly. Mine was resolved in about 6 weeks after I sent my response. Don't stress too much about it - you have legitimate grounds and good documentation. Just be prepared to explain your position clearly if they do contact you.