A. Probably not. This has been an ongoing dispute between the IRS and taxpayers. In a landmark case handed down last year (Quality Stores, Inc., DC-MI, 2/23/10), a district court ruled that severance payments aren’t subject to taxes when they are treated as wage-replacement benefits. However, the IRS hasn’t conceded the point, so you might face a challenge.
Tip: Expect this issue to resurface in another court case soon.