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Some relief for flood victims.

When a taxpayer's property is destroyed as a result of fire, earthquake, flood, hurricane, vandalism or similar event, the loss can give rise to a tax deduction. To be deductible as a casualty loss, the property must be damaged, lost or destroyed by a specific event that is sudden, unexpected or unusual. For example, destruction of trees by fire qualifies as a casualty loss, but destruction of the same trees by disease or insects generally does not qualify. Damage or destruction resulting from progressive deterioration of property, such as beachfront erosion, would not qualify as a casualty loss.

However, a taxpayer who sustains a loss from a disaster in an area that is declared eligible for Federal assistance under the Disaster Relief and Emergency Assistance Act has additional relief. Effected taxpayers have the option of (1) taking the loss on the return for the year in which the loss occurred or (2) deducting the loss on the return for the preceding tax year.

If a taxpayer sustains a loss attributable to a disaster occurring in an area receiving Federal assistance under the Disaster Relief and Emergency Assistance Act, the taxpayer may elect to deduct the loss on his or her return for the tax year immediately preceding the tax year in which the disaster occurred. Taxpayers may also claim casualty losses for personal residences that have been rendered unsafe by reason of certain disasters [Code Sec. 165 (k)]. For a taxpayer to take advantage of this provision, the following conditions must be met: * The residence must be located in

an area designated by the President

of the United States to warrant

Federal assistance under the

Disaster Relief and Emergency

Assistance Act; * The residence must have been

rendered unsafe for use as a residence

by reason of the disaster;

and * Within 120 days after the date of

disaster area determination, the

taxpayer must have been ordered

by the state or local government

in which the residence is located

to demolish or relocate the residence.

Note: A casualty loss or disaster loss may not be deducted if the individual was covered by insurance but did not file a claim. In addition, a personal casualty loss is reduced by $100 per occurrence and then subject to a 10% AGI limitation.

Beyond the normal relief available, the Service has also relaxed some filing rules for flood victims. Taxpayers in flooded areas of Illinois, Iowa, Minnesota, Missouri, Nebraska, South Dakota and Wisconsin have until October 15 to file certain Federal tax returns or pay Federal taxes that would have been due on or after June 30 and before October 15,1993. However, corporations with extensions for income tax returns originally due March 15 must file these returns by September 15, the maximum extension the law allows.

The law does not permit the waiver of interest, which must be charged from the original due date until the taxes are paid. Likewise, the due dates for depositing withheld income, social security or excise taxes and for filing employment tax returns cannot be extended. However, the IRS will abate the late deposit penalty for taxes deposited by September 15 and will abate the late filing penalty for returns filed by October 15, 1993.

The Rebirth of the 100% Penalty

A person responsible for collecting and paying over withheld employee income tax, FICA or collected excise taxes who willfully falls to do so is personally liable for penalties. Generally, the IRS can go after the "responsible party" for failure to withhold or transmit these "trust fund" taxes, including taxes withheld from employees. IRC Section 6672 subjects these individuals to a penalty equal to 100% of the tax liability. Until now, the Service has imposed this penalty in a way designed to maximize collection of these "trustfund" taxes with little regard for actual responsibility of the party from whom collection was sought. As a result, the penalty may impact lower level employees acting on orders from a top manager or company owner.

Now the Service has indicated that it will change the way it administers the penalty, which is to be known hereafter as the "Trust Fund Recovery Penalty." Under the new procedures, the Service will not assess the penalty against a non-owner employee, such as a bookkeeper or an individual who, merely performs administrative functions. In addition, the penalty will not be assessed against an exempt organization volunteer. IRS personnel will also be instructed to defer assessment of the penalty where the taxpayer is under an installment agreement or a bankruptcy plan. The new name is designed to clarify the Service's intentions to recovery only 1 00% of the monies due from the employer.
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Title Annotation:Tax Talk
Author:Green, Gary L., Jr
Publication:The National Public Accountant
Date:Oct 1, 1993
Previous Article:Damages after burke: tax-free claims.
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