Tax Implications of the Gulf Coast Disaster

If you are affected by the BP oil spill in the Gulf, you may be dealing with serious financial and personal concerns, and taxes may be the last thing on your mind. However, it is helpful to know that you may be entitled to special tax assistance and relief in some cases.

IRS Help Center

The IRS has set up a Gulf Oil Spill Information Center at www.irs.gov/newsroom/article/0,,id=224887,00.html?portlet=7. This web page provides links to various IRS resources to help victims within the region handle their tax issues.

The IRS is planning to set up a toll-free telephone number for taxpayers to speak with IRS personnel directly. These personnel will be trained to handle tax questions specifically related to the oil spill.

Questions and Answers

The IRS has also provided a series of questions and answers at www.irs.gov/newsroom/article/0,,id=224886,00.html to address the tax treatment of certain compensation and more. Here are some answers to common questions:

• Payments made for lost wages, lost business income, or lost profits are includable in gross income. For workers, payments are usually not subject to FICA (Social Security and Medicare) taxes. Payments to individuals for lost income or profits usually must be reported to the IRS and the individuals on Form 1099-MISC.
• Payments received for property damage or destruction are not included in gross income as long as they do not exceed the adjusted basis of the property damaged or destroyed. If the payments produce a gain (they exceed the adjusted basis of the property), the gain can be deferred by obtaining qualified replacement property within a set time.
• Payments received for personal physical injury or illness, or for emotional distress attributable to physical injury or illness, are tax free. Personal physical injuries include observable bodily harm (e.g., cuts, bruises, swelling, bleeding). However, payments for emotional distress that is not attributable to personal physical injury or illness are taxable.

In-Person Help

July 17 has been designated by the IRS as “Gulf Coast Assistance Day” (see www.irs.gov/newsroom/article/0,,id=224757,00.html).  On this date, the IRS will hold events in seven cities (Mobile, Alabama; Panama City and Pensacola, Florida, Baton Rouge, Houma, and New Orleans, Louisiana; and Gulfport, Mississippi) to answer questions from individuals and businesses about the impact of the oil spill on their tax situation.

Taxpayers experiencing financial hardship may be entitled to certain relief, including postponement of collection activities, flexibility for missed payments on existing installment agreements and offers in compromise, and accelerated levy releases. Those seeking an offer in compromise can have their current income and potential for future income taken into account in negotiating the offer.

Taxpayers who continue to experience particular hardships that are not satisfactorily addressed by IRS personnel can ask the Taxpayer Advocate Service for help. Find information at www.irs.gov/advocate/index.html.

Other Help

Individuals within the regions who experience damage to their property should, of course, talk with their insurance company.

For more information about help you may need to weather this disaster, including how to file a claim with BP and where to apply for disaster relief, go to DisasterAssistance.gov at www.disasterassistance.gov/daip_en.portal. You can complete a questionnaire to help determine the type of relief to which you may be entitled. This site also provides links to other federal agencies that may be of assistance. For example, the Small Business Administration makes disaster assistance loans to individuals and small businesses; find information at www.sba.gov/services/disasterassistance.