Q: Received demand for $1700 from the IRS for 2015 tax return. My wife received $14k for disability for 2015.
IRS said this is taxable. Previously this money was not taxed
A: I would suggest having a tax professional review the details of this payment and the IRS correspondence with you. Certain types of disability payments, such as payments through disability insurance paid for with after-tax earnings, are non-taxable. Other types of disability payments are fully taxable, such as disability pensions paid directly from the employer. Social Security Disability payments may be taxable based on other income received. IRS Publication 907 provides some of the general rules: https://www.irs.gov/pub/irs-pdf/p907.pdf
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