Disaster Relief for Taxpayers

As Florida begins the recovery process from Hurricane Ian, Puerto Rico deals with the effects of Hurricane Fiona, and California continues to suffer from wildfires, we find ourselves in the middle of natural disaster season. Usually after a major disaster occurs, the IRS issues a notice describing what disaster relief is available for the afflicted community. Let’s prepare ourselves in case we or our clients find ourselves in a disaster situation.

Who is affected?

The IRS considers taxpayers (individuals, businesses, and partners/shareholders) to be affected by a disaster if they are located in a federally declared disaster area (i.e., the President of the United States must have declared it a disaster area). The records a taxpayer needs to meet a filing or payment deadline must be in a covered disaster area (not necessarily the taxpayer themselves). Therefore, a taxpayer whose records are with a tax preparer who is located in a disaster area, but the taxpayer themselves is not, is still considered “affected.” Similarly, if a shareholder or partner is not located in the disaster area, but the records necessary to prepare the entity return or to file their individual return are in the disaster area, those individuals are subject to relief.

A qualified taxpayer is a(n):

• • Individual with their principal residence in the disaster area,
  • Taxpayer whose principal place of business (not as an employee) is in the disaster area,
  • Individual who is a relief worker affiliated with a recognized government or philanthropic organization who is assisting in the disaster area,
  • Taxpayer whose records are needed to meet a deadline are in a disaster area,
  • Individual visiting the disaster area who is killed or injured because of the disaster, or
  • Spouse of any of the preceding individuals

What is the relief?

Relief often comes in the form of extensions and penalty abatement. Relief is issued if there is reasonable cause that the late filing/payment was due to the disaster. Taxpayers in disaster areas may get relief from filing and paying income, excise, and employment tax returns. Additionally, they may get relief for making contributions to a traditional IRA or a Roth IRA. Installment payments due during the disaster relief period are suspended until the month following the end of the relief period.

The IRS may specify a period of no longer than one year to determine the interest, penalty, additional amounts or additions to tax, as well as any credits or refunds. There is a mandatory 60-day extension for qualified taxpayers starting on the earliest date for the declared disaster. If any filing/payment deadline is extended or postponed, the IRS will publicize the extension and issue a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance. The best resource is IRS.gov/DisasterTaxRelief to check for any postponements impacting you or your clients.

Let’s take Hurricane Fiona as an example of available relief.

• • The October 17^th deadline and other dates are extended to February 15, 2023. (For example, individuals with a valid extension of time to file their 2021 returns that were due on October 17, 2022, have until February 15, 2023. However, because payment for those returns was due on April 18, 2022, there is no payment relief.)
  • Any quarterly estimated income tax payments and quarterly payroll and excise tax returns due between September 20, 2022, and February 15, 2023 are now due February 15, 2023.
  • Businesses with an original or extended due date during the disaster period (September 17, 2022 through February 15, 2023) also have the additional time. This includes, among others, calendar-year corporations whose 2021 extensions expire on October 17, 2022.
  • Tax-exempt organizations have the additional time, including for 2021 calendar-year returns with extensions due to expire on November 15, 2022.
  • Penalties on payroll and excise tax deposits due after September 17, 2022, and before October 3, 2022, are abated if the deposits are made by October 3, 2022.

How to get relief?

The IRS automatically provides relief to taxpayers with an IRS address of record located in the disaster area. Therefore, taxpayers don’t need to contact the IRS to get relief. Typically, the address of record comes from a filed tax return. If you have a client who moved into a disaster area and they have not filed a return yet, consider filing Form 8822, Change of Address, or calling the IRS to update the records.

What if the records are destroyed?

Taxpayers can request a copy of their tax return via Form 4506, Request for Copy of Tax Return. The normal $50 fee associated with the request is waived for victims of a federally declared disaster. The IRS wants to remind tax professionals that an E-services account is the quickest and most efficient manner to obtain these records.

How to deduct losses from a disaster area?

Losses from a federal declared disaster are reported on Form 4684, Casualties and Thefts. The FEMA declaration number must be provided on the form. You can look up FEMA declaration numbers at www.fema.gov/disaster. Generally, the disaster year is the year of the disaster (makes sense), although it can be the subsequent year if the loss could not be ascertained with reasonable certainty until after the disaster year.

For losses during the TCJA period, taxpayers can claim an increased standard deduction using Schedule A, Itemized Deductions, even if they aren’t itemizing deductions on their return.

The losses are usually deducted in the disaster year, but it’s possible to amend prior year returns and treat the disaster as occurring in the previous year. The election to take the loss on the preceding year is made on Form 4684 within 6 months of the regular due date for filing the original return (without extensions). For example, a taxpayer has until October 15, 2022, to file a 2020 amended return claiming a disaster loss from 2021. This would include Hurricane Ida victims as well as Illinois tornado victims. Again, take a look at the IRS page for the specifics for any of your clients who might qualify.

What is the takeaway?

It seems likely that at some point, we will have a client suffering from a federally declared disaster or we will ourselves will be victims of one. Having the knowledge of available relief can provide some calm during a stressful period.

By Kelly Golish,  CPA
University of Illinois Tax School
Assistant Director, Tax Materials

Resources

www.irs.gov/businesses/small-businesses-self-employed/faqs-for-disaster-victims#affectedtaxpayersandrecords

IRC §7508A

Instructions for Form 4684

IR-2022-161 (Sep. 20, 2022)