Congressmen Doug LaMalfa and Mike Thompson received a response letter to their Jan. 21, 2022 inquiry and June 8, 2022 follow-up asking the IRS to issue guidance on the taxability of settlement funds received from the Fire Victim Trust. The original letter was an effort to push the IRS to clarify and expedite public tax guidance on whether payments made to victims would be taxable under federal law. In their Jan. 21, 2022 letter, CLaMalfa and Thompson were joined by California Senators Dianne Feinstein and Alex Padilla, and Congressmen Tom McClintock, John Garamendi) and Jared Huffman.
The new IRS guidance confirms that awards attributed to physical injury and emotional distress caused by physical injuries are exempt from federal taxes. Additionally, the guidance states settlement money used to reimburse or pay for reasonable and necessary personal, family, living or funeral expenses that occurred due to a loss in a federally declared disaster, are exempt from federal taxes. The guidance also includes that expenses used to fund repairing or replacing personal residences and its contents are exempt from federal taxability.
“It has been five months since we have called on the IRS to release taxability guidance. The 2022 tax season has come and gone and victims have already filed with their settlement money in mind. Many still do not have the clarity they need to understand our complex tax code while they deal with the emotional turmoil of rebuilding their homes and towns. I am appreciative that the IRS has finally come around to try to work with us on this issue, and while this guidance does give us some clarity, there are still vague and open-ended responses which need concrete answers. We will continue pressing for clarifying information until we have definite answers for all 70,000-plus Californians who face this bureaucratic uncertainty,” said LaMalfa.
“I appreciate this initial response from the IRS as claimants of the PG&E Fire Victims Trust work to navigate a complicated and potentially unprecedented tax situation,” said Thompson. “I look forward to hearing additional clarifying details from IRS in the coming weeks as the agency responds to the follow-up letter I led with Rep. LaMalfa earlier this month. I will not stop working until we have ensured that those who lost their livelihoods due to wildfires receive the funding they are owed.”
“Wildfire victims have experienced unfathomable hardship,” said McClintock. “The last thing they should be concerned with as they navigate rebuilding their lives is continued uncertainty from the IRS. I join my colleagues in calling upon the IRS to do everything in its power to provide clarity and assistance to claimants.”
“The commissioner’s letter falls short of providing the assistance that Californians need to confidently rebuild their lives after devastating wildfires,” said Huffman. “Californians need clear, direct, and personalized guidance and I look forward to continuing to work with our partners at the IRS to help address this complicated issue for our constituents.”