How does the IRS know that I received a settlement if -
The government might have a copy of the 1099. You should ask the law firm why they didn't send you a 1099. Maybe it got lost in the mail. If you know they didn't withhold taxes and you are not able to obtain a 1099, then you should probably just report the entire amount that went into your bank account as other income, and maybe attach a statement to your return. I've seen a settlement where part of the payment was categorized as wages and taxes (federal, state, FICA, state SDI) were withheld, part as interest (no taxes withheld), part as other income (no taxes withheld). I don't see the difference between interest and other income, except that more interest allows you to claim more investment interest. The difference between wages and other income is that wages is subject to FICA and SDI.
Your former employer will file a 1099 for it - because they also want to take a deduction. (Some IRS people believe that: No 1099, no deduction - because by failing to issue the 1099, the payor wasn't really treating it as a business expense). Of course, they might give you a W-2 instead.
Doesn't matter. Your attorney acted on your behalf, so you legally received it.
The IRS doesn't care. It still has to be disclosed to them because statute says so.
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