Confusing tax law impacting Camp Fire survivors corrected years later
When the physical destruction of the Southern California fires finally ends, victims of the disaster will then have to navigate a frustrating government bureaucracy in their recovery effort.
One example of that kind of red tape is an incomprehensible tax law the survivors of the 2018 Camp Fire in Paradise have been dealing with for years that IRS officials only recently were able to correct.
Kim Hurst was just starting work at about 7:15 a.m. the morning of November 8th, 2018, when she saw smoke in the distance barreling towards Paradise as it turned from white to red to black.
"We left by 8:45 and we were told by our neighbor that by 9, our house was burnt," she said.
Like everyone else, Hurst faced a harrowing trip out of town, the smoke and flames turning morning sun into the darkest of nights. Her entire family survived, but her home and virtually everything they owned was reduced to ashes. It wasn't long before the uncertainty set in.
"I knew I could get us a house built and I knew I could get us beds. But I didn't know if I could get us chairs, a couch, silverware or anything else because I didn't know if I was going to have enough money," a tearful Hurst remembered.
Most of the town was wiped out. Because PG&E was found liable for the fire, a $10 billion trust fund was established to help the victims rebuild their homes in Paradise.
"Then we found out that we had pay the taxes on it," said Hurst. "And that was really painful, because it felt like now somebody took something else away from us. And that's all we had left."
In any settlement, a significant portion of the award is paid directly to the attorneys handling the case. But in 2018 -- the same year as the Camp Fire -- the Trump administration removed attorneys' fees as a tax exempt expense, meaning wildfire victims were having to pay taxes on money they weren't even getting.
"These 80-year-old folks who have not paid taxes in ten years are now having to pay 5, 10, 15, 20,000 dollars on a settlement of 50,000 bucks," said John Knecht, a professional tax preparer and the owner of Sharrett Bookkeeping in Paradise. "We have others that paid taxes on attorney fees of $300,000, which was completely ridiculous because the attorneys are paying taxes on this income."
Knecht has become a bit of a hero to his neighbors for helping them navigate the complex system. That's because last month, President Biden signed a bill into law that eliminated the double taxation. The new law actually does more than that, getting fire victims who paid the taxes because of the settlement a refund.
"We have about 3,500 amended tax returns that we'll be doing for our clients that will recover about $28-$30 million back into their pockets," explained Knecht. "They paid taxes on about $110 million from the fire victim's trust that they should not have had to pay."
The IRS is actually shut down in January as it prepares for the upcoming tax season, so they have not yet set up a system for implementing the new law. But Knecht said he expects that the first refunds to wildfire victims could be paid out beginning sometime in July.
"Now these people can finish planning what they want to do," he said. "Some of them have held off rebuilding because they didn't know how much they were going to get, right? So now that they know that this money is coming back, they're going to be able to go forward with the next step in their life. And hopefully this will bring closure to this."
The money will be appreciated, but closure may be harder to find.
"We'll always feel this," said Kim. "Some people have more pain from it than others...but we all feel it. But you have to keep going on, you know?"
As the new fires continue to rage in Southern California, it's something those victims have yet to even think about. But in time, they too will understand what the survivors of Paradise have lived with for the last six years.
