The makings of disaster relief: putting taxes in their proper place.

As everyone knows by now, by September 14, the IRS released the broadest disaster relief ever granted, through Notices 2001-61 and 2001-63. Few realize, however, the efforts of the AICPA and other organizations to obtain that relief or the difficulties the IRS and Treasury faced in granting it.

Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Sec. 7508A authorized the Secretary to postpone tax-related due dates for taxpayers determined to be affected by a Presidentially declared disaster for a period of up to 90 days. With the enactment of Section 802 of the EGTRRA, however, the 90-day period of Sec. 7508A was expanded to 120 days. The Senate Amendment to Section 802 (which was not adopted by the Conference Agreement) called for the Secretary to create in the IRS a Permanent Disaster Response Team to assist taxpayers in clarifying and resolving tax matters associated with a Presidentially declared disaster. Historically, disaster relief has been granted on a local basis as the result of natural disasters (such as earthquakes, fires and tornadoes), but never on a national basis or as the result of a man-made disaster.

On September 12, Pam Pecarich, Chair of the AICPA's Tax Executive Committee, sent letters to Treasury Secretary O'Neill and IRS Commissioner Rossotti, urging them to grant broad disaster relief, particularly in light of the September 17 filing deadline. She wrote:

[T]he AICPA strongly recommends that the IRS and Treasury grant an extension from September 17, 2001 ... for any taxpayer nationwide. Furthermore, taxpayers and practitioners in the Presidentially declared disaster areas must be granted substantially more time to meet their tax related deadlines. We strongly urge you to immediately address this very difficult problem for the nation's taxpayers.

Later that day, the Service issued Information Release 2001-79, which stated, in part:

In the aftermath of Tuesday's tragedy, the IRS and Treasury want to assure taxpayers, businesses and tax practitioners that they are working aggressively to issue tax guidance and resolve potential issues. The IRS and Treasury will be announcing payment and filing relief for individual and business taxpayers affected by these attacks. Details will be issued as soon as possible. The IRS and Treasury want to assure the victims, families and others affected by the tragedies in New York and at the Pentagon that the agencies will do everything possible to provide administrative tax relief quickly. Just as importantly, the IRS and Treasury will work to minimize the distraction of tax issues during this terrible time.

Notice 2001-61

Late in the day on September 13, the Service released Notice 2001-61, which granted extensive relief to taxpayers directly affected by the attacks. These taxpayers included (1) any individual whose principal residence or place of employment, and any business entity whose principal place of business, was located in a covered area; (2) any individual whose principal residence, and any business whose principal place of business, was not located in a covered area but whose records needed to meet a filing or payment deadline were maintained in a covered area; and (3) any estate or trust with tax records necessary to meet a filing or paying deadline in a covered disaster area. Under the notice, individuals with extensions for filing their 2000 returns beyond Sept. 10, 2001 were granted a postponement to Feb. 12, 2002. Taxpayers other than individuals (corporations, partnerships, etc.) were granted a six-month extension to file returns otherwise originally due after Sept. 10, 2001 and before Dec. 1, 2001, and to pay the tax shown on those returns. Affected calendar-year corporations and other entities that had six-month extensions of time to file their returns that expired between Sept. 11-Nov. 30, 2001 were granted a postponement of 120 days to file their returns. Thus, for example, the 2000 tax return for an affected calendar-year corporation that had been extended to Sept. 17, 2001 would be due on Jan. 15, 2002.

Likewise, in Notice 2001-68 (supplementing Notice 2001-61), the IRS issued additional relief for tax returns on extension (not a postponement under Sec. 7508A) that expired after Nov. 30, 2001 and before Feb. 1, 2002. The deadline for such taxpayers to file their returns was postponed to Feb. 15, 2002. The additional relief applied only to taxpayers that had difficulty in meeting their Federal tax obligations because their records, computers or other essential supporting services were lost or damaged, or essential personnel were injured, killed or missing as a result of the terrorist attacks. The due date of estimated tax payments originally due after Sept. 10, 2001 and before Jan. 16, 2002 for these taxpayers was postponed until Jan. 15, 2002.

In addition, paragraph five of Notice 2001-61 provided relief to those "who have difficulty in meeting their federal tax obligations because of the disruption in the transportation and delivery of documents by mail or private delivery services resulting from the terrorist attack." These taxpayers had until Nov. 15, 2001 to file returns and make payments required to be made between Sept. 11, 2001 and Oct. 31, 2001.

While taxpayers and practitioners in New York City were relieved to receive Notice 2001-61, the notice was problematic for taxpayers and practitioners throughout the rest of the country. It did not provide national relief as the AICPA had requested, and the language in paragraph five was poorly drafted. National relief had not been granted because there were some within the Service and Treasury who believed that taxpayers outside of the Presidentially declared disaster areas could not be "affected" taxpayers for Sec. 7508A purposes. The Institute also understood that the intent of paragraph five was to cover all taxpayers who faced delays due to disruptions in the transportation system, but paragraph five did not clearly indicate this. Nor did paragraph five specifically state that it provided relief under Sec. 7508A, thereby assuring a taxpayer that filing a return by November 15 under the paragraph would be treated as timely for purposes of making certain elections.

As the IRS began to hear rumblings from the practitioner community about these issues, the IRS National Public Liaison's office hastily called a meeting on Sept. 14. Each of the major practitioner groups, including the AICPA, was invited to attend. Both Commissioner Rossotti and Assistant Secretary (Tax Policy) Mark Weinberger were present. While Commissioner Rossotti reiterated the Service's position that the government wanted to minimize the distraction of tax issues during this terrible time, Assistant Secretary Weinberger reminded the group that Treasury needed to continue to receive tax deposits. They then welcomed the practitioners in the group to comment. Many expressed concerns about the limit of paragraph five of Notice 2001-61, and others expressed concern about the inability of individual taxpayers to liquidate funds to pay their estimated tax payments (keeping in mind that the New York Stock Exchange did not reopen until September 17).

Meanwhile, representatives of the AICPA also explained that firms across the country had experienced significant losses in productivity during the week due to early closings, bomb threats and general work force disruptions. Such losses, less than a week before the major corporate due date, could not be made up over the course of just one weekend; more importantly, partners and staff needed to spend that first weekend after September 11 at home with their families. The Commissioner and Assistant Secretary clearly understood these concerns and promised additional relief that afternoon. Several hours later, The Service issued Notice 2001-63

Notice 2001-63

Notice 2001-63 provided relief to "taxpayers who, regardless of their location, are continuing to experience difficulties in meeting their filing and tax payment requirements." Given the communication, security and emotional issues that Americans faced that week, it was almost impossible for a taxpayer not to qualify for this relief. Under Notice 2001-63, taxpayers had until September 24 to meet their Federal tax obligations that otherwise fell between September 10-24.

Pam Pecarich and Gerry Padwe (AICPA, Vice President--Taxation) said it best in a subsequent letter to Commissioner Rossotti and Assistant Secretary Weinberger:

Your actions [the September 14 meeting and subsequent issuance of Notice 2001-63] represent government service of the first order. Meeting one's tax obligations is the closest most Americans come to direct interaction with the federal government, and yet financial responsibilities pale into insignificance for many compared to the individual and family tragedies we have all had to witness this past week.

FROM DEBORAH J. PFLIEGER, J.D., LL.M., SENIOR MANAGER, WASHINGTON NATIONAL TAX OFFICE, PRICEWATERHOUSECOOPERS, LLP, WASHINGTON, DC

Editor's note: Mr. Ely is former chair of the AICPA Relations with the IRS Committee. James Dougherty is the current chair. Ms. Pflieger, Ms. Jacobs and Ms. Gervie are members of the committee. Ms Pflieger is also the immediate past chair.