Form 8876: The Excise Tax on Structured Settlement Factoring
Published November 7, 2026
A structured settlement is an agreement to pay someone in installments over time, often after a lawsuit or a workers' compensation claim. Some people later sell their right to future payments for a lump sum. The tax law calls that sale a structured settlement factoring transaction. Form 8876 reports and pays the excise tax on it.
The Instructions for Form 8876 (December 2025) explain the rules. This post is general information, not advice about a specific settlement.
What counts as a structured settlement
The instructions describe a structured settlement as an arrangement with two parts. First, it must come from a suit or agreement for periodic payments of damages that are excludable from income under section 104(a)(2) or section 104(b). It may also come from a workers' compensation agreement under section 104(a)(1). Second, the payments must be the kind described in section 130(c)(2) and be payable by a party to the suit or agreement, or by a person who took on the payments under a qualified assignment.
What counts as a factoring transaction
A factoring transaction is a transfer of structured settlement payment rights for payment, by sale, assignment, pledge, or another form of encumbrance. Later transfers of those rights also count. The instructions list one main exclusion. Creating a security interest under a blanket security agreement with an insured bank does not count, as long as the bank does not redirect the payments.
Who must file
Generally, you must file Form 8876 if you acquire, directly or indirectly, structured settlement payment rights in a factoring transaction entered into after February 21, 2002. The buyer, not the person who sold the rights, is the one who files the form.
Do not file Form 8876 if the transfer was approved in advance in a qualified order. The instructions say no excise tax is due in that case.
What a qualified order is
A qualified order is a final order, judgment, or decree that does two things. It finds that the transfer does not break any federal or state law or any court order, and that the transfer is in the best interest of the payee. The court considers the payee's welfare and the support of the payee's dependents. The order must be issued under a state statute by a state court or by the agency that has exclusive authority over the underlying case.
The 40% tax on the factoring discount
The form reports and pays the 40% excise tax under section 5891. The tax applies to the factoring discount. The instructions describe that discount as the difference between two amounts. The first is the total undiscounted amount of the payments acquired. The second is the total amount the buyer paid for them.
When to file
File a separate Form 8876 for each date on which you received structured settlement payment rights in a factoring transaction. The form is due by the 90th day after you receive those rights. If you need more time, you can file Form 7004 by the due date. Form 7004 does not extend the time to pay the tax.
Penalties and interest
The instructions say a late filing penalty of 5% a month, or part of a month, can apply to the net amount due, up to a maximum of 25%. A late payment penalty of one-half of 1% a month, up to 25%, can also apply. Interest is charged on tax not paid by the due date. Each penalty does not apply if you have reasonable cause, and you must attach an explanation.
Checklist
- Find the date you received the payment rights. That date starts the 90-day clock.
- Check whether a qualified order approved the transfer in advance.
- Use a separate form for each receipt date.
- Keep the court or agency documents with your records. See How Long Should I Keep My Tax Records?.
- If the settlement was for a claim, read how the payments are taxed. See Workers' Compensation: Is It Taxable?.
Sources: Sources: IRS, Instructions for Form 8876 (December 2025) (https://www.irs.gov/pub/irs-prior/i8876--2025.pdf) This is general information, not advice about your specific return.
