By Marisa Endicott
The Press Democrat
(TNS)
Tens of thousands of Northern California fire victims stand to recover millions of dollars in reimbursements for federal taxes paid on wildfire settlements now that the Federal Disaster Tax Relief Act, HR 5863, finally passed Congress last month and was signed by President Joe Biden on Dec. 12.
While the California Legislature eliminated state taxes on settlement payments in 2022, compensation for homes, businesses and lives lost in wildfires caused by Pacific Gas & Electric equipment was considered taxable income by the federal government.
John Knecht, owner of Sharrett Bookkeeping and Income Tax Service, said those who want to file amended returns should start early.
Knecht knows the settlement tax issue well. His firm is in Paradise, the site of the 2018 Camp Fire, which killed 85 people and essentially razed the Sierra Nevada foothills town. The firm has about 1,600 clients with fire claims and has picked up more who are now seeking to file amended tax returns for past years.
“We have hundreds of clients that have called in already and said, ‘Can I get in the queue? Can I get in the queue?” Knecht told The Press Democrat in an interview about what fire victims should expect and how to take advantage of the long-anticipated tax code changes.
“Everyone’s excited,” he added, noting that his clients alone paid taxes on about $105 million that is now exempt, meaning they stand to recover roughly $28 million. “That’s a huge amount.”
Refunds for years of past taxes
Knecht and his team have already started to prepare amended tax returns “because everyone’s chomping at the bit to get these refunds,” he said. But, it’s a “bit of a waiting game” because the Internal Revenue Service has yet to acknowledge they’re ready to implement the new law. “We have to be very careful about how quickly we pull the trigger.”
Although the law’s provisions don’t require new rulemaking by the IRS, the agency could request the returns all have a specific heading or carry other identifiers, for example, which could allow for an expedited filing process.
Knecht noted that the IRS could receive upwards of 210,000 amended tax returns just from 2018 Camp Fire survivors, not to mention the returns of all the other eligible fire victims, including those from the 2015 Butte Fire and the 2017 North Bay firestorm.
An IRS agent told Knecht in October they’d just finished processing returns through 2022, he said. “Now they’re going to get this big influx, so if we can give them keywords that they’ve told us to use, it’s going to make it a lot faster.”
The IRS shut down for personal filings at the end of November to prepare for the upcoming tax season and won’t reopen until later in January.
“Hopefully they’ll sort it out before then,” Knecht said. Since the IRS takes about 16 to 18 weeks to process amended returns, “we’re telling people hopefully it’ll be Christmas in July.”
On Dec. 20, U.S. Reps. Mike Thompson, D- St. Helena, and Doug LaMalfa, R- Richvale, and state Democratic Sen. Alex Padilla, who led the federal tax relief effort, sent a letter to the heads of the IRS and the U.S. Department of the Treasury urging swift implementation.
They asked that the IRS develop a set of guidelines for fire survivors seeking to file returns and develop a community outreach strategy. They also requested the IRS allow all returns to be filed and issued electronically. As it stands, returns for 2020 and 2021 would have to be paper-filed. Knecht strongly encouraged filers to have their banking information registered in the IRS system to receive funds electronically rather than by mail if that’s an option.
“Californians who have suffered devastating wildfire losses have waited too long for tax relief,” Thompson said in a statement to The Press Democrat. “I continue to urge the IRS to swiftly implement tax relief for victims of federally declared disasters. I will work with the IRS in any way needed to help ensure that wildfire survivors have access to their full settlements and federal benefits.”
The IRS did not provide comment on its plans for implementation.
Once taxpayers do file their amended returns, they can check the status of their filings and reimbursement through an IRS online tracking tool (www.irs.gov/filing/wheres-my-amended-return).
The IRS will pay interest on refunds, Knecht said, and penalties for underpaid or unpaid estimated tax payments will be automatically repaid.
Standard rules provide taxpayers with a three-year window from the date of their original tax return to claim a refund. However, a provision in the new tax bill sets a deadline of Dec. 12, 2025, a year from when the law was signed, to claim refunds associated with the new exemption.
Recouping lost benefits and penalties
Adding insult to injury, the fact that compensation was, until now, considered income pushed some fire victims into different tax brackets, causing them to lose public benefits, incur higher health care costs or face penalties for “misreporting” their earnings.
Knecht said he has clients on fixed incomes whose Social Security was suddenly taxable for the first time and some whose Medicare premiums went up $400 to $500 per month. Others, who didn’t adjust their reported income to Covered California, California’s health insurance marketplace, faced penalties for the government’s supposed over-subsidizing of their premiums. Some of Knecht’s clients were penalized around $2,000, but one was even hit with an $18,000 bill.
Covered California penalties should come back as a refund automatically with no extra work for fire victims beyond filing amended returns. Knecht said, however, that clients on Social Security have received mixed responses when it comes to reimbursements for increases in Medicare premiums. “What we’re suggesting is to take a copy of your amended tax return and go visit your local Social Security office and say, ‘Please help us work through getting our increased premiums reduced and refunded.’”
Knecht said it’s good to get a jump on amended returns, cautioning that many tax professionals will switch focus to regular 2024 tax filings come the end of January and then pick back up on amended filings in May.
He also said that he’s heard quite a bit about tax preparers overcharging for amended returns, which are a quick and easy fix for the most part if the same professional prepared the original filing. “I would say this: If you think you’re being charged too much, you should consult another tax adviser for comparison,” Knecht said. “Unfortunately, some tax preparers are taking advantage of the situation.”
The Federal Disaster Tax Relief Act covers compensation for federally declared disasters after 2014, excluding payments for wildfire losses and some other disasters from federal income taxes received in 2020 through the end of 2025. It exempts compensation for losses from the 2023 East Palestine, Ohio, train derailment, too. Attorney fees paid in a settlement are also now tax-free.
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(c)2025 The Press Democrat (Santa Rosa, Calif.). Visit The Press Democrat (Santa Rosa, Calif.) at www.pressdemocrat.com. Distributed by Tribune Content Agency LLC.
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Tags: Income Tax, IRS, Legislation, Taxes
