Disasters And Taxes

What Victims Need to Know About Not Paying Their Taxes

Disasters And Taxes
September 15, 2017

If you have been the victim of a disaster such as a fire, tornado, or the recent Hurricanes Harvey or Irma, you know that the last thing on your mind is how it will affect your taxes. Unfortunately, if you forget to take timely action on your taxes, your misery could be compounded. Depending on the severity of the disaster, the Internal Revenue Service may help, but you had better make sure you're on solid ground (pun intended).

Should disaster strike near tax time, you can ask for an automatic six-month extension by filing Form 4868 by April 15th and paying your estimated taxes at that time. Otherwise, you run the risk of late filing or late payment penalties.

Late Filing Penalties

The late filing penalty is 5% of the unpaid taxes for every month your return is late, up to a maximum of 25%. If you file more than sixty days after the due date, the minimum penalty is $205 or 100% of your unpaid tax bill. Late payment penalties are similar except that they accrue at 0.5% per month instead of 5%.

Do not just take a chance on IRS mercy without making any significant effort. The IRS may waive penalties for late filing and late payment with proper documentation, but filing a Form 4898 can buy you valuable time to recover any necessary tax information that was lost.

Disaster Assistance Resources

Fortunately, the IRS has several webpages to help you in case of a disaster. The Disaster Assistance page contains a useful series of links to disaster assistance resources, including Topic 515 – Casualty, Disaster, and Theft Loss and the Disaster Resource Guide.

In cases where the President has declared a particular region as a disaster area, the IRS may allow for delays of various tax-related deadlines. The most recent information will be covered on the IRS page "Tax Relief in Disaster Situations." Relief varies according to the disaster and those affected, but examples include waiving fees and expediting requests for previous tax returns, extensions on tax payments and filing dates, and extensions for business-related transactions like failure-to-deposit penalties for employment taxes.

For example, it was recently announced that victims of Hurricanes Harvey and Irma with tax deadlines falling on or after August 23, 2017, and before January 31, 2018, are granted additional time to file through January 31, 2018. In addition, all workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief.

Another byproduct of a federal disaster declaration is that you can choose to deduct your casualty losses from the disaster in the tax year that immediately precedes it. You can submit an amended return Form 1040X to make your claim. This should be submitted by the due date of the return in the year that the loss actually occurred — for example, a loss that occurred in September of 2017 could be applied to the 2016 tax year as long as the amended form is filed by the due date for 2017 taxes (April 17th, 2018). This allows you to apply the loss where it can save the most on taxes.

It will take time to determine casualty losses, since you will need to reconstruct records, assess values of the losses, and calculate the difference between the determined value and insurance payments (you can only deduct un-reimbursed losses). Use IRS Form 4684, "Casualties and Thefts," to calculate the losses, and then transfer those to the appropriate form for itemizing those losses. IRS Publication 547, "Casualties, Losses, and Thefts," provides more detailed information on claiming your losses. The IRS has announced a streamlined process for victims of Hurricanes Harvey and Irma to take out loans and hardship distributions from their 401(k)s and other employer-sponsored retirement plans.

In the 2017 tax reform discussion, there have been proposals to abolish casualty loss deductions. If these plans are passed into law and you fall victim to any future disasters, you may not be able to get any tax relief, so it is important to reassess your insurance coverage. Most homeowners and renters insurance policies don't cover flood damages, but the Federal Emergency Management Agency (FEMA) offers flood insurance through its National Flood Insurance Program.

The IRS understands that disasters may make it difficult to file and pay your taxes on time; therefore, they offer as much assistance as possible via their website. Use all of the information that is available to you, and do not just assume that your tax problems will take care of itself. Take proactive action to file for any necessary and allowed delays, and your taxes need not be added to your list of problems.

Get your Refund Fast and File your Taxes for Free.

Photo ©iStockphoto.com/imagedepotpro

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Nancy | 01.14.16 @ 18:01
I never considered how a natural disaster could effect your taxes. It's good to see that there is help in place if I ever need it.
Erin | 01.14.16 @ 18:02
Wow, I'm not sure I would be in the right frame of mind to remember to do any of this. I guess this is where having a list and all of your important documents in a safe comes in handy so you don't have to do as much thinking. Thank you for the helpful tips.
Carla | 01.14.16 @ 18:02
We were fortunate with the recent flooding in our area. We live up on a mountain but just down the road, many of our friends had a lot of damage. I will pass this info on to them.
Beverly | 01.14.16 @ 18:02
Good information to have. Thankfully, I haven't been in any sort of disaster.
Daniel | 01.14.16 @ 18:03
no real surprise that even through a terrible event taxes have a role
Steffanie | 01.14.16 @ 18:03
Good to know how this works. We have never been in the situation but will keep it in mind
Heather | 01.14.16 @ 18:04
I think anyone in this situation wouldn't be thinking about filing an extension. It would be nice if your insurance agent could give you this friendly reminder since they would be the one you are talking to constantly.
Alec | 01.14.16 @ 18:05
I never thought about how disasters could affect taxes and other parts of a person's life! I'm glad that the IRS allows for some wiggle room for those who have gone through something so traumatic!
irene | 01.14.16 @ 18:06
Good to know that there is help if needed but I hope we don't have any disasters in the immediate future.
Brittany | 01.14.16 @ 18:07
I never quite took any of this into account. However, we do have distaster's insurance because we had a flooding incident a few years ago and have taken proper means to protect the home ever since.
$commenter.renderDisplayableName() | 03.06.21 @ 12:10