Following a natural disaster, the affect such a calamity would have on ones taxes is likely the last thing on an individual’s mind—if it crosses his or her mind at all. However, as inconsequential of a thought as it may seem as an individual is contending with the physical manifestations of what a natural disaster leaves in its wake, taxpayers should know that the IRS provides hardship related relief to those individuals so affected.
Disaster Area and Affected Taxpayer
Generally, for eligible taxpayers to take advantage of any relief offered by the IRS, the IRS must first denote whether a locale is a covered disaster area. A covered disaster area refers to an area of a federally declared disaster.
For taxpayers to take advantage of the natural disaster related tax relief that the IRS offers, individuals must be “affected taxpayers.” Those who qualify for relief include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a recognized deadline are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.
Under Code Sec. 7508A, the IRS is afforded authority to give affected taxpayers an extended date to file most tax returns. In addition, the IRS may postpone tax payments that have either an original or extended due date that falls on or after the start of the disaster, and on or before the date of the extension. Additionally, the IRS can postpone periods in which to make contributions to, and distributions from, a qualified retirement plan, as well as recharacterization and rollover elections. Other actions that the IRS can postpone include the filing of a petition with the Tax Court, filing a claim for credit or refund, as well as bringing suit on a claim for credit or refund.
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record that is located in the designated disaster area. As such, taxpayers need not contact the IRS requesting relief. In some instances, the IRS will also waive late-deposit penalties for federal payroll and excise tax deposits. However, taxpayers who receive late filing or late payment penalty notices should call the number located on the notice to have the penalty abated.
The most significant assistance that the IRS can afford those taxpayers affected by natural disasters is through the casualty loss deduction. Affected taxpayers in federally declared disaster areas are given the option of claiming disaster-related casualty losses on their federal income tax return for the year in which the event occurred, or the prior year, but in any case, not in more than one tax year. On October 13, the IRS issued final and temporary regs, as well as a revenue procedure that extends the due date by which a taxpayer may make a Code Sec. 165 disaster loss election.
The temporary regs has extended the due date for making a disaster loss election to six months after the due date for filing the taxpayer’s federal income tax return for the disaster year, which is determined without regard to any filing extension. The IRS provided guidance, in the form of Rev. Proc. 2016-53, along with the regs that provide the procedures and requirements for how a taxpayer makes or revokes the election.
In efforts to encourage taxpayers to be proactive in planning for storms and other natural disasters, the IRS released guidance advising taxpayers as to steps they can take before disaster strikes. Employers who use payroll service providers are advised to ask the provider if it has a fiduciary bond. Such a bond protects the employer in the event of default by the payroll service provider in the wake of a natural disaster. In addition, the IRS advised that taxpayers should have an updated disaster plan. In addition, taxpayers should keep a duplicate set of key documents including bank statements, tax returns, identifications and insurance policies. Taxpayers are encouraged to photograph or videotape the contents of their home, as this makes it easier to quickly claim any available insurance and tax benefits after disaster strikes.
Additionally, the IRS makes every effort to ensure that taxpayers can access their previous-filed tax returns. Taxpayers can request copies of previously-filed tax returns and attachments, to include Form W-2, by filing Form 4506, Request for Copy of Tax Return. Taxpayers may also request transcripts showing most line items on these returns by ordering through the Get Transcript link on www.irs.gov, by calling 1-800-908-9946, or by using Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return.