The IRS has issued guidance to victims of the BP oil spill:
“This is a very difficult time for many people affected by the oil spill in the Gulf of Mexico,” said IRS Commissioner Doug Shulman in a statement. “As residents of the region cope with the evolving situation, I want to assure them that the IRS will be doing everything it can to provide tax help to those who need it. We encourage anyone who has an issue with the IRS to contact us and explain their hardship, and we will work with them to find a solution. We’ll do everything we can under current law to help taxpayers.”
The guidance released Friday is based on current law, and it explains how recipients of payments from BP should treat the payments for tax purposes.
The IRS confirms what I said earlier today in a post titled Senator Landrieu Wants Guidance on BP Oil Spill Tax Questions and I Provide it Free of Charge (emphasis added):
According to the current law, BP payments for lost income are taxable in the same way that the wages or business income these payments are replacing would have been. The law treats compensation for lost wages or income differently for tax purposes than compensation for physical injuries or property loss, which generally are nontaxable.
Finally, the IRS cautions taxpayers not to assume a certain tax treatment applies without first consulting with their tax advisors:
Every person can have unique financial circumstances, so the IRS encourages taxpayers to review their tax situation or talk with their tax preparers about the implications of payments or compensation from the oil spill.
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