My understanding is that a damage award or settlement that just puts a person in the position they were in before, without adding to their financial wealth, is not taxable. Because of the issues surrounding Chinese drywall that had to be torn out and replaced in a house, a friend received a damages settlement of $20,000. The company reported this on 1099-MISC in box 3 as "other income". The program the friend is using to do their taxes carries this to line 21 of the tax return and doesn't provide a way to make it non-taxable. Is this money taxable? If not, how should it be handled on a tax return to make it non-taxable? If it is just left off, wouldn't the IRS audit and require payment of the tax? Should the company that issued the 1099 retract it and issue a corrected one showing $0? Thanks.