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Accounting for casualty losses during a national disaster.

Recently, accounting for disasters seems to be an annual event, with all the hurricanes, tornadoes and floods. The President has had to declare disaster areas numerous times, thus allowing for specialized accounting and exceptions to the rules.

General Tax Relief

During a national disaster, the IRS may postpone tax deadlines, under which the following are eligible for relief under the rules:

1. Any individual whose main home is located in the disaster area; see, e.g., IR News Release 2005-96.

2. Any business entity whose principal place of business is located in a covered disaster area; see id.

3. Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area; see, e.g., IR News Release 2005-103.

4. Any individual, business entity or sole proprietor whose tax records needed to meet a postponed deadline are maintained in a covered disaster area; see, e.g., IR News Release 2004-118. The main home or principal place of business does not have to be located in the covered disaster area.

5. Any estate or mast whose tax records needed to meet a postponed tax deadline are maintained in a covered disaster area; see, e.g., Notice 2005-82.

6. The spouse on a joint return with a taxpayer who is eligible for postponements; see id.

7. Any other person determined by the IRS to be affected by a Presidentially declared disaster; see id.

Under Sec. 7508A, the IRS may postpone for up to one year certain tax deadlines for taxpayers affected by a Presidentially declared disaster. The deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes and making contributions to traditional and Roth IRAs; see Sec. 7508(a) (1). If deadlines are postponed, the IRS publicize the postponement in the relevant area and publish a news release, revenue ruling or other guidance in the Internal Revenue Bulletin. Generally, such guidance will also be set forth on the IRS's website, at

The extension to file and pay does not apply to information returns, such as Forms W-2; 1098, Mortgage Interest Statement; 1099; 5498, IRA Contribution Information; 1042-S, Foreign Person's U.S. Source Income Subject to Withholding; or 8027, Employer's Annual Information Return on Tip Income and Allocated Tips, or to employment and excise tax deposits; see, e.g., IR News Release 2005-128. Taxpayers whose specific disaster-related circumstances prevent them from making timely tax deposits may seek penalty abatements on a case-by-case basis. To qualify, affected taxpayers should write the assigned disaster designation in red ink at the top of their returns. Individuals or businesses located in a disaster area and directly affected by the disaster should contact the IRS if they receive penalties for filing returns or for paying or depositing taxes late.

Relief for Homeowners

Homes made unsafe by a disaster must be located in a Presidentially declared disaster area to qualify their owners for relief. 'State and local governments may order homeowners to tear down their homes or move them, due to unsafe living conditions in the area. Under this circumstance, an order must be issued within 120 days of the disaster area declaration to either demolish or move the home; see IRS Pub. 547, Casualties, Disasters, and Thefts, under "Disaster Area Losses" p. 11-12. Homes would be considered unsafe if (1) they are substantially more dangerous after the disaster than before; and (2) the danger substantially increases the risk of future destruction from the disaster.

Homeowners can file for casualty losses in the same manner as they would file for a personal-use casualty loss. Note: there is no casualty loss if a home is unsafe due to dangerous conditions existing before a disaster. This is true even for homes already condemned (e.g., the home is located in an area known for severe storms).

The time to decide when to file for casualty losses is limited. A claim can be made on the return for the previous year, or for the year of the disaster, whichever result is better. The decision must be made by the following dates: 1. The due date (without extensions) for filing an income tax return for the tax year in which the disaster actually occurred.

2. The due date (with extensions) for filling the return for the preceding tax year.

For example, calendar-year taxpayers will ordinarily have until April 15, 2006 to amend their 2004 returns to claim a casualty loss that occurred in 2005. They can revoke their choice within 90 days of making it, by returning refunds or credits received. However, if they revoke the choice before receiving a refund, they must return the refund within 30 days after receiving it, for the revocation to be effective. They must figure the loss under the usual rules for casualty losses, as if the loss occurred in the year preceding the disaster.

The IRS will offer other relief to affected taxpayers. It will waive the usual fees and expedite requests for copies of previously filed tax returns for taxpayers who need them to apply for benefits or to file amended returns claiming casualty losses. Such taxpayers should write the assigned disaster designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster has affected them, so that it can appropriately consider their cases.

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Author:Parker, Kenneth M.
Publication:The Tax Adviser
Date:Jan 1, 2006
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