IRS To Partially Tax BP Compensation Payments to Victims

The oil spill in the Gulf is a crying shame. BP has finally been forced to start paying out compensation to victims. The only problem is the IRS is set up to tax most of it.

Imagine if many of the businesses in your area suddenly were effectively put out of business? What would the effect be? It would be brutal. The businesses would be devastated, but so would everyone that works for them. This would then trickle down to businesses that sell to those workers and so on.

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This is exactly what is happening in the Gulf. The fishing industry is being crushed. So are any businesses directly working with the ocean. As the oil comes ashore, the tourism industry is about to get a brutal and ugly beating right in the middle of the summer vacation season. It doesn’t get much worse than that.

BP has predictably lagged on setting up a compensation plan for victims. Some serious arm twisting by the President has put an end to that. $20 bill is now in escrow for victims with an independent party administering it. Money is starting to go out, but now a new issue has raised its head for victims – taxes.

The IRS is being bashed for announcing that any payments to victims for lost revenue or income out of the BP fund will be taxed. In truth, this is the law and the IRS would be remiss to do anything else than this. I’m hardly on the side of the Agency, but they truly have no choice pursuant to the law.

The IRS is actually up to something with this announcement. The Agency cannot write or change the law. Congress, however, can. One tends to think the Agency is trying to generate publicity on the subject so as to get Congress moving on a solution for victims.

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At first glance, you might think this sounds strange. We are talking about the IRS after all. Normally I would agree with you, but not in this case. The IRS has historically acted quickly and beneficially to taxpayers in crisis situations. During Katrina, it announced that it would waive restrictions on certain diesel fuels so that they could be used on cars. Within two weeks of the crisis, the Agency also published a change in regulations that allowed Katrina victims to not only immediately claim losses from the hurricane, but to also apply them to the previous two years to generate immediate tax refunds. Compare that to the response of the rest of the government agencies!

Will victims of the BP oil spill have to pay taxes on the compensation they receive? Only if Congress doesn’t pass an exemption to the general tax code requirements. Contact your representative today!

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