I paid several thousand dollars in security deposit violations to a tenant (Chicago). Should I file a 1099-MISC ?

If you are in doubt, file the form. It is an information return. If it is just that you were ordered to return additional amounts of a security deposit that you withheld in violation, this is not income to the tenant and probably does not need to be reported on a 1099. Further information as to what you are actually returning to the tenant would be necessary to determine what this actually represents.

I would speak to your CPA or tax lawyer about this, since it isn't clear from your question what the nature of the funds is. Is the money just a return of a tenants security deposit? No form would be due in that case. Is the money being paid out of a legal settlement or court judgement and does it exceed the value of the security deposit plus interest? Then, yes, you may need to file 1099-misc. You will also have to separate the types of payments (i.e., return of deposit vs settlement money) and only someone who knows the details of your matter can help with this. You should also check to make sure you are following the proper procedure per Illinois and City of Chicago law.

It cannot hurt to file the form since it is merely an information return. Of course if you talk to a competent tax return preparer that person can help you clarify whether it is actually required.