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IRS grants tax relief to families affected by Red Hill water crisis

Internal Revenue Service Federal Building. (U.S. General Services Administration)

Families were being taxed for the relocation assistance they received from the military, sparking anger.

Civilians whose drinking water was contaminated by jet fuel from the Navy’s Red Hill storage facility in November 2021 will not have to pay federal or state income taxes on reimbursements they received from the military to cover expenses such as temporary lodging, meals and personal property damage, following guidance released Wednesday by the Internal Revenue Service.

The emergency assistance was paid out to an estimated 1, 700 civilian families who were on the Navy’s drinking water system that serves neighborhoods in and around Joint Base Pearl Harbor-Hickam. Affected families started receiving 1099 income forms from the IRS a few months ago stating that they owed taxes on the relocation assistance, sparking outrage from the residents.

Hawaii’s congressional delegation stepped in, to Acting IRS Commissioner Douglas O’Donnell in March calling on the IRS to use its authority to exempt the assistance from taxes. U.S. Sen. Brian Schatz said he subsequently convened a meeting with senior officials from the Department of Defense, the IRS and the Treasury Department to push for the payments to be excluded.

“These taxes were unfair and unexpected, and I’m glad we were able to fix this, ” Schatz said in a news release applauding the IRS decision.

Hawaii Rep. Ed Case, who also advocated for the exclusion, said in a news release that it was “straight-out wrong to tax families displaced from their homes through no fault of their own.”

The announcement comes just two weeks before the deadline for filing 2022 tax returns.

The IRS said that families who have not yet filed their federal tax returns should not include the payments as part of their gross income.

Those who already have filed and included the payments in their gross income can file amended returns on. If the original federal tax return was filed electronically, the amended return should also be filed electronically, according to the IRS guidance.

For electronic forms, the “Explanation of Changes ” should specify “Red Hill Relief, ” according to the IRS. For paper forms, filers should mark the top of their Form 1040-X with “Red Hill Relief ” and begin Part III, “Explanation of Changes, ” with “Red Hill Relief.”

Following the IRS announcement, Hawaii Gov. Josh Green said that the state also would not require the affected families and individuals to pay taxes on the relief.

Hawaii Department of Taxation Director Gary Suganuma will ensure the state is aligned with the IRS guidance, the governor’s office said, and will be posting guidance for those affected online.

“Under these extraordinary circumstances, I applaud the IRS for doing what’s right, ” Green said.

The water contamination affected approximately 93, 000 people, primarily military families, who for several months were under a state Department of Health advisory not to drink the water. Thousands of families relocated to hotel rooms or moved out of their housing as the Navy and regulators worked to restore safe drinking water. It wasn’t until mid-March 2022, nearly four months after the jet fuel contamination was discovered, that all neighborhoods were given the all-clear.

Only civilians who received reimbursements for relocating and other expenses were taxed, which is why the IRS guidance only applies to them.

Defense Secretary Lloyd Austin announced in March 2022 that it would be permanently shutting down the Red Hill facility in the wake of the disaster, a decision that followed intense pressure from the state and widespread opposition among the community to keeping the underground fuel facility in operation.

Joint Task Force-Red Hill is overseeing 253 repairs that have been identified as necessary in order to safely drain about 104 million gallons of fuel that has been sitting idle in the tanks since November 2021. So far 129 of the 253 repairs have been completed, according to a new online dashboard established by the task force. Of the completed repairs, 56 have gotten the signoff from a third-party reviewer and DOH.

The task force says that it is still on track to hit its target of draining all of the fuel by June 2024. It’s not yet clear what will happen to the infrastructure, including tanks and pipelines, after defueling is complete. DOD is looking at alternative uses for the facility that do not involve the storage of hazardous materials.


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