Alex Padilla U.S. Senator for California

WASHINGTON, D.C. — U.S. Senator Alex Padilla (D-Calif.) and Representatives Mike Thompson (D-Calif.-04) and Doug LaMalfa (R-Calif.-01) urged the Internal Revenue Service (IRS) to take immediate actions to implement their bipartisan legislation providing critical tax relief and getting money back into the hands of wildfire survivors. President Biden recently signed the Federal Disaster Tax Relief Act into law, which included their Protect Innocent Victims Of Taxation After Fire Act.

Their bill supports the nearly 70,000 survivors who suffered significant losses during the three major California fires in 2015, 2017, and 2018 who have received related settlement payments, as well as future recipients of other wildfire settlements. Many California wildfire survivors have already been taxed on their settlement payments, with some even losing access to certain federal benefits as a result of their compensation wrongly being considered income. The requests outlined in the letter are instrumental in delivering the full relief these wildfire survivors deserve.

“[M]any Californians that received compensation have already been taxed on these payments in previous calendar years. This has significantly and unfairly hindered their ability to rebuild after devastating loss,” wrote the lawmakers. “Now that President Biden has signed this bill into law, the IRS must take every action available to provide clarity and guide taxpayers through the changes to the tax treatment of such payments.”

“Californians who have suffered inconceivable losses as a result of utility-caused wildfires have waited too long for tax relief,” continued the lawmakers. “We appreciate your attention to this matter, and we look forward to working with you to ensure that wildfire survivors have access to their full settlements and federal benefits.”

Specifically, the lawmakers recommended that the IRS take the following urgent steps in implementing Section 3 of the Fire Disaster Tax Relief Act:

• Prioritize the drafting and approval of FAQs: The lawmakers asked the IRS to quickly finalize relevant FAQs so that impacted taxpayers can begin applying for refunds.

• Make necessary technical changes to IRS’ systems: Sec. 3(e) of the Fire Disaster Tax Relief Act extends the period of limitation for credit or refund claims allocable to the exclusion of settlement payments to one year after the date of enactment. To implement this, the IRS must make technical updates to process applications and issue approved refunds online.

• Maximize community outreach and education: The lawmakers pushed the IRS to provide targeted outreach and work with community partners to ensure that all eligible taxpayers are aware of these tax code changes.

• Ensure all federal benefits are restored: Many wildfire survivors who would have otherwise qualified for certain federal benefits were wrongfully denied because their income was artificially inflated from the settlement payments. The lawmakers urged the IRS to ensure taxpayers are also made whole on federal benefits, such as Affordable Care Act premium assistance and Child Tax Credit and Earned Income Tax Credit payments.

Earlier this month, Senator Padilla spoke on the Senate floor following the unanimous passage of the Federal Disaster Tax Relief Act.

Full text of the letter is available here and below:

Dear Secretary Yellen and Commissioner Werfel:

As members of the California delegation representing wildfire survivors that have received settlement payments for losses suffered during the three major California fires in 2015, 2017, and 2018, we write to urge the Internal Revenue Service (IRS) to take immediate action on implementing Section 3 of the Federal Disaster Tax Relief Act. President Biden recently signed our legislation to exempt such compensation from gross income for income tax purposes.

As you know, our tax code fails to clarify that disaster settlement funds, which are already insufficient in covering the full cost of losses, are neither income nor asset. Unlike those impacted by the fires that ravaged southern Oregon and Maui, many Californians that received compensation have already been taxed on these payments in previous calendar years. This has significantly and unfairly hindered their ability to rebuild after devastating loss. Now that President Biden has signed this bill into law, the IRS must take every action available to provide clarity and guide taxpayers through the changes to the tax treatment of such payments.

Specifically, we ask that you:

• Prioritize the drafting and approval of FAQs: Our understanding is that the provisions in this bill are self-enacting and do not require Department of the Treasury or IRS rulemaking. In order for impacted taxpayers to begin the refund process as soon as possible and receive the funding necessary to finance continued recovery, we ask that the IRS expedite the development of relevant FAQs.

• Make necessary technical changes to IRS’ systems: Sec. 3(e) extends the period of limitation for credit or refund claims allocable to the exclusion of settlement payments to one year after the date of enactment. The IRS should make the necessary technical changes to current systems to allow for the processing of applications and issuance of approved refunds online. This will be critical for allowing a seamless and quick return process to put money back in the hands of wildfire survivors.

• Maximize community outreach and education: Successful implementation of this bill will require targeted outreach to impacted taxpayers so that all eligible individuals are made aware of these changes to the tax code. The IRS must utilize every available resource to train and work in collaboration with community partners to ensure that all eligible taxpayers are able to submit refund applications.

• Ensure all federal benefits are restored: Those who would have otherwise qualified for certain federal benefits administered by the IRS were denied because their gross income was artificially inflated as a result of the settlement payments. The IRS should ensure that, in filing for credit or refund, taxpayers also receive retroactive federal benefits (e.g., Affordable Care Act premium assistance, Child Tax Credit and Earned Income Tax Credit payments, etc.) from these taxable years. We also ask that IRS work with other federal agencies to ensure taxpayers can apply for any non-IRS administered benefits.

Californians who have suffered inconceivable losses as a result of utility-caused wildfires have waited too long for tax relief. We appreciate your attention to this matter, and we look forward to working with you to ensure that wildfire survivors have access to their full settlements and federal benefits.

Sincerely, 

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