The Federal Disaster Tax Relief Act (FDTRA; P.L. 118-148) authorizes an exclusion of qualified wildfire disaster relief payments paid to an individual taxpayer, retroactive to the 2020 tax year. The FDTRA gives taxpayers until December 12, 2025, to file a refund claim for closed tax years. However, prior to the update in the Internal Revenue Manual, it was unclear how taxpayers should claim this retroactive relief. (See the link to new IRM 21.6.6.2.48 below.)
The IRM states that taxpayers should file Form 1040-X to claim a retroactive exclusion. The wildfire that pertains to their claim must be notated at the top of paper returns and in Part II, Explanation of Changes, of Form 1040-X. For electronically filed returns, a PDF file titled with the applicable Wildfire Disaster must be attached. See the FEMA website for a list of all federally declared disasters.
We have heard from at least one tax professional who filed Form 1040-X for a prior tax year that the IRS disallowed the exclusion because the taxpayer did not file Form 4684, Casualties and Thefts, along with Form 1040-X even though there was no loss claimed. However, the IRM does not require that Form 4684 be filed with Form 1040-X. Should the IRS request a Form 4684 when there is no loss to report, we recommend that you cite the IRM.
Also, according to the IRM, nontaxable payments are not included on Form 1040, even if Form 1099-MISC was issued.
Qualified wildfire relief payments
The exclusion applies to any qualified wildfire relief payment received by an individual during the 2020 through 2025 taxable years that is related to a federal disaster (as defined by IRC §165(i)(5)(A)) declared after 2014 as a result of any forest or range fire. (FDTRA §3(d))
A “qualified wildfire relief payment” is any amount received by or on behalf of an individual as compensation for losses, expenses, or damages. (FDTRA §3(b)) Nontaxable payments include compensation for:
• Additional living expenses;
• Lost wages (other than compensation for lost wages paid by the employer that would have otherwise paid such wages);
• Personal injury or death; or
• Emotional distress.
IRM 21.6.6.2.48 is available at:
www.irs.gov/irm/part21/irm_21-006-006r
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