Under current law, BP payments for lost wages are taxable — just like the wages would have been, the IRS said in tax guidance issued Friday.
Payments for physical injuries or property loss, however, are generally
tax free. Payments for emotional distress? Taxable, though medical expenses related to the emotional distress are deductible.

BP officials have agreed to create a $20 billion fund for spill victims, as well as a $100 million fund to support displaced oil rig workers.

The IRS issued the guidance Friday to help spill victims sort through the law's complexities. The agency has posted tax information for oil spill
victims on its website and plans to hold forums in seven Gulf Coast
cities on July 17 to help victims with tax troubles or questions.

"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," IRS Commissioner Doug Shulman
said. "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," Shulman added.

Rep. Charlie Melancon, D-La., introduced a bill this week to exempt from taxes all BP payments to spill victims, though its prospects for
becoming law were uncertain.

"Compensation from BP will help, but during this uncertain time Louisianians will need to stretch every dollar and should not have to worry about setting aside a portion of the payments for taxes," Melancon said in a statement.

Ken Hoagland, chairman of the National FairTax campaign, an anti-tax group, said, "These modest payments are just putting food on the table and
should not be taxed."

The IRS has a number of programs to help people who make a good-faith effort but cannot afford to pay their tax bills. Agents can postpone collections in certain
hardship cases or allow delinquent taxpayers to skip installment payments if they have made timely payments in the past.

The IRS will hold its July 17 forums for oil victims in these cities: Mobile, Ala.; Panama City, Fla.; Pensacola, Fla.; New Orleans; Houma,
La.; Baton Rouge, La.; and Gulfport, Miss.