JENNIFER HENRIE-BROWN: So, I see, it's the top of the hour, so let's get started with our web
conference. Welcome to our IRS presentation, Understanding Tax Relief for Disaster. We're
glad you're joining us. My name is Jennifer Henrie-Brown and I am a Stakeholder Liaison at the
Internal Revenue Service, and it is my pleasure to be your moderator for today's web conference,
Understand Tax Relief for Disaster. But before we begin the presentation, I'd like to ask that
if you are with the media, please send us an e-mail message at the address we provided on this
slide. And that address is CL.SL.Web.Conference.Team@IRS.gov. In your e-mail, please include
your contact information and the news publication you're with. Our media relations or
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please click the "cc" button on the left side of your screen. This feature will be available
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them by clicking on the "Ask Question" button, also on the left side of your screen. Enter your
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this enough, please do not enter any sensitive or taxpayer-specific information. And most
likely, the presentation content will cover your question, so please wait for your specific topic
to be addressed before submitting your question. We appreciate your questions because they help
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click the "Submit" button. Now, during the presentation, we'll take a few breaks to share
knowledge-based questions with you and at those times, a polling style feature will pop up on
your screen with a question and multiple-choice answers. Select the response you believe is
correct by clicking the radio button next to your selection and then click "Submit." Note, you
may need to turn off your pop-up blocker to receive these questions, and if you do not get the
pop-up box for responding, just go ahead and enter your response timely in the "Ask Question"
feature so we can track your participation. Our presenters for today's web conference are Anna
Falkenstein and Joseph McCarthy. Anna and Joe are Senior Stakeholder Liaisons in IRS'
Communications and Liaison Division. Both work with tax professionals and small business owners
providing outreach and education and identifying ways the agency can be more responsive to
customers' needs. Well, there's no time like the present to get started, so Anna, I'll turn it
over to you. ANNA FALKENSTEIN: Thanks, Jennifer. As Jennifer stated, I'm Anna Falkenstein and
I'm going to get us started today by giving you an overview of today's webinar. Now, this
presentation addresses the types of relief that may be provided as a result of a federally
declared disaster. Please note that Congress may pass legislation specific to a particular
disaster that may differ from these general rules. Now, in this presentation, we're going to
discuss matters related to individual taxpayers. While we will touch on a few issues related to
businesses, our main focus will be on disaster related relief provisions for individuals. The
reason for this is that the rules that are related to casualty losses for businesses really have
not changed, while the rules for individuals have. The Tax Cuts and Jobs Act provided that for
taxable years 2018 through 2025, any personal casualty loss shall be allowed as a deduction only
to the extent that it was attributable to a federally declared disaster. Now, my co-presenter,
Joe McCarthy is going to go over today's objectives. Joe. JOE MCCARTHY: Thanks, Anna. The
objectives of today's presentation are to make you familiar with a number of different
disaster-related tax topics. They include identifying types of relief available to taxpayers in
a disaster area, calculating disaster area casualty losses, documenting casualty losses in a
disaster area, obtaining information about federally declared disaster areas, and learning about
IRS disaster assistance and emergency relief program. Now, today's presentation is not intended
to make you an expert on the topic, but rather to raise your awareness related to these topics
which can be quite complex at times. So, let's start with the types of relief that are available
to taxpayers in a disaster area. Anna, do you want to go ahead and get us started on the
different types of disaster relief available? FALKENSTEIN: Sure, Joe. So, there are a number of
different types of federal tax relief that are available to victims of disasters. They include
administrative relief, tax relief, safe harbor provisions and the election to claim disaster
losses on a prior-year tax return. Now, each of these provisions offer a different type of
relief, and in addition to each of these provisions, they have their own qualifying criteria,
and that can make determining whether or not they apply to somebody in a particular situation a
bit challenging. So that being said, we're going to be walking you through each of these relief
provisions so that you will become a little more familiar with the fundamentals of each type of
relief. Joe, I'm going to turn it back to you to highlight some of the key points for our
audience. MCCARTHY: All right, Anna. Some of the key points we hope the viewers take away from
this presentation are that there are two different types of relief for disaster victims,
administrative relief and tax relief. The administrative relief is the granting of additional time
to file tax returns like Form 1040, pay taxes like estimated taxes and perform other time
sensitive tasks like contributing to a qualified retirement plan. Tax relief, on the other
hand, is the claiming of a casualty loss on a tax return. Finally, the type of FEMA designation
usually determines the type of relief, either administrative relief or tax relief or both, that
is available to disaster victims. We'll be going over to each of these points in more detail as
the presentation goes on as they can be quite confusing. FALKENSTEIN: Joe, I have a quick
question. MCCARTHY: Sure. FALKENSTEIN: For the purposes of today's presentation, what is a
disaster area? MCCARTHY: Well, a disaster area is any area determined by the President of the
United States to warrant assistance by the federal government under the Robert T. Stafford
Disaster Relief and Emergency Assistance Act. FALKENSTEIN: Thanks. Now, here's another one, so
how would you find out if a weather-related event is designated a federally declared disaster
area? MCCARTHY: Great question, Anna. A federally declared disaster area is, they're posted to
this FEMA website, that's www.FEMA.gov and some are posted to the IRS website. However, it's
very important to know that not all federally declared disasters are posted on the IRS website,
and in a few slides, I'll show you why. Now, before we discuss administrative relief in detail,
I'd just like to point out to the tax professionals attending the webinar on most slides, you'll
see references to the Internal Revenue Code, Internal Revenue Regulations, the IRS Revenue
Rulings, IRS Revenue Procedures, and other sites. These sites are provided so you can go
right to the source of information if you'd like to obtain more detailed information on the
topic that's being discussed on that particular slide. Okay, on this slide, you can see the
different types of administrative relief that can be made available for federally declared
disasters. An administrative relief is granted by the IRS in geographic locations designated by
the President as federally declared disaster areas and when FEMA designates an area to receive
individual assistance. We'll talk more about FEMA individual assistance program later in the
presentation. Anyway, when this happens, the IRS may grant additional time to file tax returns
and pay taxes. The types of administrative relief are: granting an additional time to file
certain types of tax returns like Forms 1040, 1120 or 1065; granting additional time to pay
certain taxes like estimated taxes; and granting additional time to perform time sensitive acts
such as making contributions to qualified retirement plans, filing a petition with the tax court
or filing a claim or credit for a refund of any tax. And also give the IRS the ability to waive
or abate interest and penalties or both for both late filing and late payment penalties.
FALKENSTEIN: Joe, I've got a quick question for you, but before I do, I just want to mention
that a few of our attendees say they're having a hard time hearing you. Can you speak up just a
little bit? You said MCCARTHY: I will try. FALKENSTEIN: Okay. You said that administrative
relief such as granting additional time to file tax returns, does that mean all returns are
granted time or there are only specific ones? MCCARTHY: No. Generally, the granting of
additional time to file tax returns does not apply to information returns in the W2, 1098, 1099
or 5, 4, 9, 8 series or for Forms 1042-S or 8027. FALKENSTEIN: Okay, and you also said that
administrative relief granting additional time to pay certain types of taxes, I'm guessing
that's not all taxes. Which ones would we be looking at? MCCARTHY: Okay. While the due dates for
estimated taxes, tax payments may be extended, payments for taxes like employment taxes and excise
taxes are still required to be paid on a timely basis even if the business is located in a
disaster area. That said, it's important to note that the IRS may abate penalties on such late
payments for affected taxpayers due to reasonable cause during and immediately following the
disaster. Taxpayers whose specific disaster-related circumstances prevent them from making timely
payments or deposits may seek penalty abatements on a case-by-case basis. FALKENSTEIN: So, the
reason why the IRS provides administrative relief is to give the disaster victims a little more
time to deal with the crisis at hand, and that allows the taxpayers to comply with their tax
obligations at a later date, right? MCCARTHY: That's exactly right. Let's face it, when
you're a victim of a flood or a hurricane or a tornado or a wildfire or a volcano flow, the first
thing that goes through your mind is not, I have to file my tax return, or I have to pay my taxes.
No. You're thinking of really important things like where am I going to live, how am I going
to eat, do I still have a job? As such, the IRS wants to give taxpayers in federally declared
disaster areas additional time to file and pay their taxes. The IRS issues a press release
outlining what forms qualify for delayed filing and what taxes qualify for delayed payment and
how much additional time will be granted to file those returns and to make those tax payments.
Another type of administrative relief offered by the IRS is the waiving of fees for obtaining
copies of tax returns and expediting handling of requests for copies of tax returns or tax
return transcripts. Copies of actual tax returns cost $50 and can take weeks to obtain. Those
$50 fees are waived, and the requests are expedited. Now, in order to get fees waved and request
expedited, you should write the applicable disaster title information, including the disaster
number in red at the top of the Form 4506 which is the request for a copy of a tax return or Form
4506-T, which is a request for a transcript of a tax return. And both forms are available on
the IRS website. FALKENSTEIN: That's great that the Forms 4506 and 4506-T are on the website.
And copies of tax returns and tax transcripts, they can be obtained at either an IRS Tax
Assistance Center, but you do have to get an appointment, or they can request it by phone, by
mail or through a tax preparer who has qualified to use the Transcript Delivery Service through
IRS e-Services. Now, just so you know, the IRS does maintain a listing of zip codes that are
located in federally declared disaster areas. So only the Forms 4506 and 4506-T that are filed
with those zip codes can have those fees waved. HENRIE-BROWN: Anna, forgive me for
interrupting, but since you and Joe have covered a lot of information, this may be a good time
to have our first polling question. FALKENSTEIN: That sounds good to me. HENRIE-BROWN:
Thanks, Anna. Okay, everyone. So here is our first polling question. And it is, what are the
different types of administrative relief? Is it A, granting additional time to file tax return;
B, granting additional time to pay tax return; C, granting additional time to perform certain
other time sensitive acts; D, waiving or abating interest and late filing or late payment penalties
or E, all of the above? So please click the radio button you think is the correct response.
And remember, if you do not get the pop-up box for responding the polling question, please enter
your response using the "Ask Question" feature so we can track your participation. I'll read
the question again, what are the different types of administrative relief? A, granting
additional time to file tax return; B, granting additional time to pay tax return; C, granting
additional time to perform certain other time sensitive acts; D, waiving or abating interest in
late filing or late payment penalty or, E, all of the above? We'll give you a few more seconds
to mark your selection. Okay. We're going to stop the polling now. And we'll share the correct
answer on the next slide. Ah! And the correct response is E, all of the above. What are the
different types of administrative relief? Granting additional time to file tax return, pay
taxes, perform certain other time sensitive acts, and waiving or abating interest and late
filing or late payment penalties. So, let's see how well you did on this question, 95 percent
of you got it correct. Fantastic! OK. So, Joe, can you address who is eligible for these types
of administrative relief? MCCARTHY: I certainly can, Jennifer. These types of administrative
relief are available only to affected taxpayers. An affected taxpayer is generally any
individual whose principal residence is located in a disaster area, the spouse of an affected
taxpayer when filing a joint return, or any business entity or sole proprietorship whose
principle business, principle place of business is located in a disaster area. In addition, an
affected taxpayer is any individual, business entity or sole proprietorship not located in the
disaster area but whose records are located in the disaster area. Now, there are a few more
categories of who is an affected taxpayer, which can be found in the regulations cited at the
bottom of the slide. But these are the main ones. But it is important to remember that you
don't have to live in a federally declared disaster area in order to be an affected taxpayer. If
you or your spouse lives in a federally declared disaster area assuming you file a joint return
or if you are a taxpayer and who's not located in disaster area but whose records are, you can
qualify as an affected taxpayer. FALKENSTEIN: Okay, Joe, remind me again, what does being an
affected taxpayer actually do for the individual taxpayer? MCCARTHY: Okay. Being an affected
taxpayer means that the individual can qualify for any of the administrative relief provisions
we previously discussed, like granting additional time to file certain types of tax returns and
paying certain types of taxes. And let me repeat that because it's so important. Being an
affected taxpayer means that an individual can qualify for any administrative relief provisions
like being granted additional time to file tax returns, pay taxes or perform other
time-sensitive tasks. Jennifer, I know you just had a polling question, but I think it's a great
time for our next polling question. HENRIE-BROWN: I agree, Joe. Okay. So, our second polling
question is a true or false question. And here it is. You do not have to live in an affected
disaster area to be considered an affected taxpayer. Is this statement true or is it false?
Please click the radio button you believe is the correct response. I'll repeat the question, you
do not have to live in an affected disaster area to be considered an affected taxpayer. Is this
statement true or is it false? We'll give you a few more seconds to respond. Okay. We will stop
the polling now and we'll share the correct response on the next slide. Ah! And, the correct
response is true. For purposes of claiming the disaster loss, you do not have to live in the
affected disaster area, if your record were stored in the affected disaster area. So, let's see,
let's see the results of how you did. And going up, 96 percent. My goodness, we're going up.
We're going to get 100 pretty soon. This is great. Okay. So, Joe and Anna? What's next? Let's
move on. MCCARTHY: Okay. Now, we're getting into a topic that can be a bit confusing because it
deals with both FEMA and the IRS, so bear with me. When the President declares a federal
disaster, FEMA determines what counties or if you're in Louisiana, parishes make up a disaster area.
FEMA also determines what types of assistance they'll offer in the disaster area. FEMA
assistance can come in one of three forms; public assistance, individual assistance or a
combination of individual and public assistance. FALKENSTEIN: All right, Joe, so what's the
difference between public assistance and individual assistance? MCCARTHY: Well, Anna, FEMA
public assistance is when FEMA provides grants to state and local governments for items like
debris removal, preparing roads and bridges and public buildings and public utilities. On the
other hand, FEMA individual assistance is when FEMA provides grants to individuals for items like
temporary housing, housing repair and replacement as well as funeral expenses, just to name a
few. FALKENSTEIN: So, what difference does it make if FEMA grants public assistance, individual
assistance or both? What has that got to do with the IRS and individual taxpayers? MCCARTHY:
Great questions. On the next slide, we're going to explain what types of assistance FEMA
provides and how the types of assistance have tax implications for individual taxpayers.
FALKENSTEIN: All right, Joe. It's the next slide, so tell us why is that the type of assistance
designated by FEMA so important? MCCARTHY: Well, Anna, because the type of assistance
designated by FEMA dictates the type of relief offered by the IRS. Now, we just talked a lot
about administrative relief. Well, if you look at the chart, you'll see that if FEMA designates
an area to receive public assistance only, that area will not usually qualify for administrative
relief. So, areas that receive only public assistance will usually not be granted extra time to
file tax return, pay taxes, or perform other time-sensitive acts. FALKENSTEIN: So, looking at
the chart, administrative relief is only granted when FEMA designates an area to receive
individual or individual and public relief, is that right? MCCARTHY: That is correct. Any
time FEMA designates an area to receive individual or individual and public relief, the IRS will
grant administrative relief. FALKENSTEIN: That's good to know. All right, tell me how can
taxpayers tell if the IRS has provided administrative relief? MCCARTHY: Well, like I said
before, when FEMA grants individual assistance or individual and public assistance, the IRS will
put out a press release outlining the specific types of administrative relief being granted like
postponed due dates for tax returns and payment deadlines. These press releases are available
on the IRS website. FALKENSTEIN: Now, if I'm reading the chart correctly, when it comes to tax
relief, which means claiming casualty losses, any time taxpayers are in a federally declared
disaster area that receives any type of FEMA assistance, they can qualify for tax relief. And
that means they can deduct qualifying casualty losses on their tax return. It doesn't matter
what type of FEMA assistance is being offered, whether it's public assistance only, individual
and public assistance, or individual assistance only. So basically, any type of FEMA assistance
enables taxpayers in a disaster area to claim the qualified casualty losses on their tax return,
is that right? MCCARTHY: You're right. When FEMA grants any type of assistance in a disaster
area, taxpayers in that disaster area can claim qualified casualty losses on their tax returns.
Now, always make sure to check the FEMA website to see if a county or if you're in Louisiana a
specific parish is part of the federally declared disaster area. If it is, then taxpayers in
those counties or parishes are able to claim qualified casualty losses on their tax returns.
But don't stop there, check to see if FEMA provides individual or individual and public relief,
if so, taxpayers in those counties or parishes will likely qualify for administrative relief as
well. Check the IRS website. There're specific types of administrative relief being offered.
And again, check the FEMA website for federal disaster declarations and check the IRS website
for any types of administrative relief being provided. Anna, I think we have an example of a
FEMA disaster map to share with the audience, am I right? FALKENSTEIN: You must have read my mind,
Joe. So here is a map and it is an example of a FEMA disaster map. Now, if you look at this
map of Alabama, you can see that the map is coded in three different colors. Now, each covers a
specific county. And if you look to the side bar, you will see that each of these colors
represents different FEMA disaster declaration classification. So, let's go through each of them
one at a time. The white areas on the map are counties not designated by FEMA as federally
declared disaster areas. The counties in white would generally not receive any type of
administrative disaster relief, for example, late filing of tax returns or late payment of taxes.
However, individual taxpayers in the counties in white might be able to deduct casualty losses
on their tax return if the losses are attributable to a federally declared disaster. MCCARTHY:
The gold and yellow areas on the map are designated by FEMA to receive public assistance only.
As such, they will qualify for tax relief like claiming casualty losses on a tax return;
however, they would generally not qualify for administrative relief, for example being granted
additional time for filing of tax returns or additional time to pay taxes. The brown areas on
the map are counties designated by FEMA to receive individual and public assistance. As such,
they would qualify for both administrative relief and tax relief, so they would be able to claim
casualty losses on their tax returns and in addition they would receive administrative relief
including such things as being given additional time for the filing, have certain tax returns,
paying certain taxes, and to perform other time sensitive tasks as we previously discussed. The
IRS would issue a disaster relief press, I'm sorry, disaster press release outlining these
specific administrative types of administrative relief that are being made available to
taxpayers in those designated counties. FALKENSTEIN: Okay, Joe. So, you're telling me that the
type of FEMA designation impacts the types of relief that a taxpayer can qualify for. MCCARTHY:
That is correct. So, to recap, a taxpayer does not have to be in a federally declared
disaster area in order to claim a casualty loss. However, and this is a big however, the
casualty must be attributable to a federally declared disaster and be located in the state where
the disaster is declared. That said, FEMA is usually pretty generous when designated disaster
areas, so most casualty losses will be located within a federally declared disaster like the
brown and the gold counties designated as disaster areas in the FEMA map being shown on the
screen. In any case, having insurance coverage or rather should I say adequate insurance
coverage is still extremely important. It's also extremely important to remember that these
rules apply to individual taxpayers. Business taxpayers are subject to a separate set of rules.
Let's go to our next polling question. HENRIE-BROWN: Sounds good to me, Joe. Okay. Our third
polling question is, when is administrative relief usually granted? So, which is the best
response? Is it, A, when FEMA designates an area to receive individual assistance; B, when FEMA
designates an area to receive individual and public assistance; C, when FEMA designates an area
to receive public assistance, or D, which is A and B? Please click the radio button you believe
is the best answer. And remember, if you don't get that pop-up box for responding to our
polling questions, just go ahead and enter your response using the "Ask Question" feature. I'll
read the question again. When is administrative relief usually granted? Is it A, when FEMA
designates an area to receive individual assistance or, B, when FEMA designates an area to
receive individual and public assistance; C, when FEMA designates an area to receive public
assistance or D, which is both A and B? We'll give you just a few more seconds to respond. Okay.
We're going to stop the polling now. And we'll share the best answer on the next slide. And
the best response is D, when is administrative relief usually granted? It is granted when FEMA
designates an area to receive individual assistance or when FEMA designates an area to receive
individual and public assistance. Okay. So, let's see if you're still going to hold up to that
outstanding record that you've been doing as far as polling questions. Let's hope, 85 percent,
not bad but it's going down. Okay. But hey, that's a B plus, so I'm happy. FALKENSTEIN: [Laughter] Okay,
Jennifer. Before we go on, I do want to share something else with our audience. HENRIE-BROWN:
Sure. FALKENSTEIN: All notices that the IRS, when the IRS grants administrative relief to
federally declared disaster areas, all those notices are posted to the IRS website. So, all you
have to do is type in the search word, disaster, in the homepage and follow the links to what
counties or parishes in a particular state are being granted administrative relief. Now, in the
previous slides, we, we've been mentioning casualty losses, Joe what exactly is a casualty?
MCCARTHY: Anna, that's a great question as it gets right to the heart of one of the main
issues we're discussing today. A casualty is the damage, destruction or loss of property
resulting from an identifiable event that is sudden, unexpected and unusual. Let's talk about
what sudden, unexpected and unusual mean. The term sudden means swift, not gradual or
progressive. The term unexpected means ordinarily unanticipated and unintended. And the term
unusual means not a day-to-day occurrence and not typical of the activity in which you are
engaged. The terms sudden, unexpected, and unusual are used to describe the characteristics of a
casualty and were established through various revenue rulings in court cases. The primary
revenue ruling at which these definitions are based is shown on the slide. Recently, casualties
have occurred in disaster areas that have suffered hurricanes, wildfires, tornadoes and volcano
flows and recently floods. These weather-related events have been determined to be sudden,
unexpected and unusual and therefore the damage, destruction or loss of property resulting from
them meet the definition of a casualty. FALKENSTEIN: Joe, I have another question for you.
MCCARTHY: Sure. FALKENSTEIN: So how would a taxpayer go about computing a casualty loss?
MCCARTHY: Well, a casualty loss is limited to the lesser of the adjusted basis before disaster
or the decrease in the fair market value as a result of the disaster, decreased by any insurance
or other reimbursements. Now, there are a few other things you have to remember when it comes to
loss reimbursements. If in the year of the casualty there is a claim for reimbursement and there
is a reasonable prospect of recovery no portion of the loss that may be reimbursed is allowed.
You must reduce your loss even if you do not receive the payment until a later tax year. If
your property is covered by insurance, you must file a timely insurance claim for reimbursements
of your loss, otherwise you cannot deduct any reimbursed portion of a casualty. The portion of
the loss usually not covered by insurance, for example, a deductible, is not subject to this
rule. Now there are two methods of determining the amount of a decrease in the fair market value
outlined in the Treasury regulations. The first method is by competent appraisal. This
appraisal must recognize the effects of any general market decline affecting undamaged as well as
damaged property which may occur simultaneously with the casualty in order that any deduction
under this section shall be applied to the actual loss resulting from damage to the property.
FALKENSTEIN: Okay. I think we need to look at the second method now. The, the cost of repairs to the
property that's damaged is also acceptable as evidence of loss of value. So if the taxpayer
shows that the repairs are necessary to restore the property to its condition immediately before
the casualty, or the amounts spent for such repairs is not excessive, and the repairs do not cost
more than the damage that was suffered, and the value of the property after the repairs does not
result, and of the repairs, exceeding the value of the property immediately before the casualty,
that's a lot. But either method is acceptable for determining the decrease in fair market
value. Now when you are using either method, the loss is limited to the adjusted basis in the
property. Joe, do you know of any other limitations? MCCARTHY: Funny you should ask. There are
some additional limitations on deducting casualty losses on your tax return. First, you have
to itemize your deductions. If you don't itemize your deductions, you generally can't deduct
casualty losses on your tax return. Assuming you do itemize your deductions, your casualty loss
would have to be larger than $100 and would have to exceed more than 10 percent of your adjusted
gross income in order to derive any tax benefit from claiming the loss. FALKENSTEIN: All right,
Joe. It looks like there are a number of qualifiers, all of which must be met in order for an
individual to claim a casualty loss. And let's go through a few of these here. Number one, it
has to be attributable to a federally declared disaster area. Number two, the taxpayer must have
suffered a casualty loss. Number three, the taxpayers must itemize their deductions. And
number four, last but not least, the casualty loss must be larger than $100 and exceed 10
percent of the individual's adjusted gross income. Do you have anything else to add? MCCARTHY:
Yes, I do. I just want to reiterate that all these qualifiers must be met in order for an
individual to claim a casualty loss on their tax return. But remember and this is very
important, all these qualifiers do not apply to business casualty losses. The business casualty
losses, all the business has to do is suffer a qualify casualty. The business does not have to
be in a federally declared disaster area. In addition, a business casualty loss would not be
deducted as an itemized deduction or be subject to the $100 and 10 percent of adjusted gross
income rules. Anna, why don't you give us an example showing how to compute a casualty loss?
FALKENSTEIN: Okay. I can do that. So, let's say in this example, 2018 and a hurricane has now
destroyed your home in Florida. The President declared that a major disaster exists in the
State of Florida due to that hurricane. The home cost $144,800 when you bought it several years
ago. This is your only casualty loss for the year. The fair market value of the home
immediately before the disaster was $180,000, but unfortunately the fair market value
immediately after the disaster is $35,000, which is basically the value of the land. So, the
loss is $144,800, which is the lesser of the adjusted basis of the property or the decrease in
fair market value. So, this loss is before you start accounting for your insurance
reimbursement. So again, we had that $144,800 loss which is the lesser of the adjusted basis of
property or the decrease in fair market value before the insurance reimbursement. Now you
collect $130,000 from your insurance company, which is going to reduce your loss. Then your loss
is further reduced by $100 and 10 percent of your adjusted gross income which this year was
$80,000. This means that your deductible casualty loss is $6,700 which is deducted as an
itemized deduction on your tax return. Now we want you to know that this example is actually
pulled straight from Publication 547. We may have changed some of the scenario a little bit,
but the dollars are the same. So that's Publication 547, Casualties, Disasters, and Theft. And
we encourage you to go in and take a look at that and the other examples. Okay, once you have
claimed the casualty loss, are you done, Joe? MCCARTHY: Not quite. If you claim a casualty loss
you must adjust your basis in the property. To do so you would decrease the basis in the
property by any insurance or other reimbursement you might receive, and by any deductible loss.
You would also increase your basis in the property by the amount you spend on repairs that
substantially prolong the life of the property, increase its value or adapt it to a different
use. To make this determination compare the repaired property to the property before the
casualty. MCCARTHY: Now we are going to discuss some safe harbor provisions. FALKENSTEIN:
Before we go over the safe harbor provisions, could you answer a real quick question? MCCARTHY:
Sure. FALKENSTEIN: What exactly is a safe harbor provision? MCCARTHY: That a good question. A
safe harbor provision is an exception to a general rule. With these different safe harbor
provisions, you don't have to use the normal method for determining the decrease in the fair
market value which we discussed in the previous slides. Rather, you can use one of these
provisions to determine the decrease in fair market value. The safe harbor provisions on the
screen now apply only to personal use residential real property. And I want to remind you that
the safe harbor provision we are about to discuss do not apply to business casualty losses. The
different safe harbor methods for determining the decrease in the fair market value for personal
use residential real property are the estimated repair costs method, the de minimis method, the
insurance method, the contractor safe harbor method, and the disaster loan appraisal method. We
will go over each of these safe harbor methods in the following slides. FALKENSTEIN: Before we
do that, can you tell us what the significance of each of these safe harbors are? What do they
do? What do they actually do for the taxpayer? MCCARTHY: Sure. Let me go back to the computing
a casualty loss slide and I'll explain. Okay. Remember when we were discussing that a
casualty loss was the lesser of the decrease in the fair market value as a result of a casualty,
or that the adjusted basis before the casualty? Well safe harbors are an alternative method for
computing the decrease in the fair market value as a result of the casualty. This is one of the
factors in computing a casualty loss. And it's the first factor on this slide that is
highlighted in yellow. FALKENSTEIN: Great, thanks. MCCARTHY: Okay. Let's talk about the estimated
repair costs safe harbor method. The estimated repair cost safe harbor method allows you to
figure the decrease in the fair market value of your personal use residential real property using
the lesser of two repair estimates prepared by separate and independent licensed contractors.
The estimates must detail the itemized costs to restore your property to the condition
immediately before the casualty. The estimated repair cost safe harbor method is limited to
casualty losses of $20,000 or less. This safe harbor is available for personal use residential
real property only and the property must be located in a federally declared disaster area.
FALKENSTEIN: All right. Let's continue on with the de minimis method. The de minimis safe
harbor method allows you to figure the decrease in the fair market value of your personal use
residential real property based on a written good faith estimate of the cost of repairs required
to restore your property to its condition. And that condition was immediately before the
casualty. You must keep your documentation showing how you estimated the amount of your loss.
The de minimis method, safe harbor method, that's only available for casualty losses of $5,000
or less. MCCARTHY: Next up is the insurance safe harbor method. The insurance safe harbor
method allows you to figure the decrease in the fair market value of your personal use
residential real property based on the estimated loss in the reports prepared by your homeowners
or flood insurance company. These reports must set forth the estimated loss you have sustained
on the damage or the destruction of your property. FALKENSTEIN: All right. On to the
contractor's safe harbor method. Now under the contractor's safe harbor method you may use the
contract price with the repairs that are specified in a contract prepared by an independent and
licensed contractor. And that will help you determine the decrease in the fair market value of
your personal use residential real property. This safe harbor method doesn't apply unless you are
subject to a binding contract signed by you and the contractor setting forth the itemized costs
that will restore your personal use residential real property to its condition immediately
before the casualty. MCCARTHY: Now finally, we're going to talk about the disaster loan
appraisal method. Under the disaster loan appraisal safe harbor method, you may use an
appraised, an appraisal prepared to obtain a federal loan or federal loan guarantee that identifies
your estimated loss from a federally declared disaster, to determine the decrease in the fair
market value of your personal use residential real property. And just like all the other safe
harbor provisions this safe harbor provision is available only for personal use residential real
property and the property must be located in a federally declared disaster area. FALKENSTEIN:
On this slide, we are still discussing safe harbor, but now we've got a little twist. These
safe harbors are for personal belongings. First, the de minimis method, under the de minimis
method you can make a good faith written estimate of the decrease in the fair market value of
your personal belongings. You must maintain records describing your affected personal
belongings, as well as your methodology for estimating your loss. And this method is limited to
losses of $5,000 or less. Finally, we have the replacement cost safe harbor method. To use the
replacement cost safe harbor method, you must first determine the current cost to replace your
personal belongings with new ones. And then reduce that amount by 10 percent for each year you
may have owned the personal belonging. You can see the personal belongings valuation table in
Revenue Procedure 2018-08. And if you choose to use the replacement cost safe harbor method,
then you must use that method for all of your personal belongings with just a few exceptions.
The safe harbors are available for personal belongings that are located in a federally declared
disaster area. So, note that each of the safe harbor methods we discussed are subject to
additional rules and exceptions. And if you want more detailed information on those rules and
exceptions, please go ahead and take a look at Revenue Procedure 2018-08. That can easily be
found on the internet. Now we are going to switch topics. Here are some disaster-related
payments that are not included in gross income. So right now, we are going to talk about
disaster relief payments. Qualified disaster relief payments are not included in gross income to
the extent that any payment is not compensated for by insurance or otherwise. So, if the
taxpayer receives a qualified disaster relief payment and does not receive any insurance or
other reimbursement for qualified related expenses the relief payment then is not included in
your gross income. MCCARTHY: There are three different types of qualified disaster relief
payments. The first type for disaster relief payments are payments to reimburse or pay
reasonable and necessary personal, family, living or funereal expenses incurred as a result of a
qualified disaster, also known as a federally declared disaster. So, these types of payments are
excluded from gross income. For example, if a taxpayer's home is completely destroyed by a
tornado and they receive funds which don't include insurance proceeds to put them up temporarily
in a hotel, those payments would not be includable in income. FALKENSTEIN: Now the second type
of disaster relief payment or payments incurred for repair or rehabilitation of a personal
residence or repair replacement of its content, to the extent that the need of such repair,
rehabilitation or replacement is attributable to the qualified disaster. So, assuming that a
taxpayer does not receive any insurance or other reimbursement for the expenses, the payments
would be excluded from gross income. For example, if a taxpayer did not have flood insurance
for their home, but they received funds to help replace a carpet or dry wall of a flooded home,
then those funds would be excluded from income. MCCARTHY: Finally, disaster relief payments or
grants made by the federal, or state, or local government or agency related to a federal
disaster which are based upon need are excluded from gross income. Two other items not shown on
the screen are payments made by charitable organizations or employers. These payments may also
be excluded from gross income. And if you want to get more information on that, you would have
to see Revenue Ruling 2003-12. For more on this topic, and again, that's Revenue Ruling 2003-12
for more information on that. FALKENSTEIN: Thanks, Joe. I do want to remind people that there
is no double benefit related to qualified disaster relief payments that are allowed. That means
that you can't have a deduction or a credit that would be allowed to the extent of the amount of
any qualified disaster relief payments that are excluded from income. Remember, excluding
qualified disaster relief payments under income or from your income apply only to individuals.
These exclusions from income do not apply to businesses and their casualty losses. MCCARTHY:
Okay. We discussed tax treatment for qualified disaster relief payments, now we are going to
discuss qualified disaster mitigation payments. Now, I know relief payments and mitigation
payments sound like they are the same thing, but they are different. Qualified disaster
mitigation payments are any amount which is paid pursuant to the Robert T. Stafford Disaster
Relief Act or the National Flood Insurance Act to or for the benefit of an owner of any property
for hazard mitigation. Let's look at some examples of qualified disaster mitigation payments to
highlight what these payments are, and their tax treatment. FALKENSTEIN: The qualified
disaster mitigation payments are payments that are made by FEMA to taxpayers under the FEMA
Disaster Mitigation Program and they include the Flood Mitigation Assistance Program which
provides funding to protect life and property from repetitive future natural disasters. We also
have the Hazard Mitigation Grant Program. And that provides post-disaster funding to protect,
again, life and property from future natural disasters. These are payments that individual
property owners receive from FEMA to reduce the risk of future damage to their property.
Qualified disaster mitigation payments are excluded from gross income. Now in addition,
qualified disaster mitigation payments do not increase the basis in property or expenditures
made with respect to those payments. So, no deduction or credit is allowed related to qualified
disaster mitigation payments. However, just like qualified disaster relief payments, no double
benefit related to the qualified disaster mitigation payments are allowed. MCCARTHY: On this
slide we will discuss the tax treatment of gains on unscheduled personal property. No gain is
recognized on any insurance proceeds received for unscheduled personal property that was part of
the contents of a main home. An unscheduled property and insurance payment is the lump sum
insurance reimbursement received from the contents from a home or apartment that was involved in
a disaster. Usually an insurance company will list in the policy what types of properties must
be scheduled such as high value jewelry or high-end computer systems, but other household items
are classified as unscheduled. This income exclusion applies to both homeowners and renters who
receive insurance proceeds from damaged or destroyed property in a home or apartment as a result
of a federally declared disaster. So, taxpayers who receive insurance payments or reimbursements
for unscheduled property, no gain is recognized on that property. FALKENSTEIN: Joe, real quick,
can you give us some examples of unscheduled property? MCCARTHY: Sure, Anna. Examples of
unscheduled property would include clothes, bedding, small electronics, sports equipment and
jewelry of minimal value like costume jewelry. They would all be examples of unscheduled
property. So, let's say the insurance company gives you a $100 for a TV that might actually have
been worth $75. No gain is recognized on that TV. That's what this provision means. Also,
payments for temporary living expenses received by an insured individual directly from FEMA and
that's the key, the payment, payments for temporary living expenses have to be directly from FEMA, are
also excluded from gross income. The next tax provision we are going to discuss falls under
Internal Revenue Code Section 165. Again, that's 165. Taxpayers may elect to deduct a casualty
loss that occurred in the current year on their preceding year tax return, if the casualty loss
occurred in a disaster area, and was attributable to a federally declared disaster, so taxpayers
may be looking to you, their tax professional to determine whether you should claim any 2018
disaster-related casualty losses under 2018 or 2017 tax year return. FALKENSTEIN: So, remember,
this provision only applies in cases where there is, one, federally declared disaster, meaning
that the disaster subsequently was determined by the President of the United States to warrant
assistance by the federal government under the Robert G. Stafford Disaster Relief and Emergency
Assistance Act. And two, the casualty loss that occurred within the disaster area and was
attributable to the federally declared disaster. MCCARTHY: So, on this slide where it states
that a federally declared disaster that warrants assistance can take the casualty in a prior
year, it means that any type of assistance designated by FEMA would qualify the taxpayer to make
the election to deduct a casualty loss in the prior year. FALKENSTEIN: That's right, Joe. It
doesn't matter if FEMA provides public assistance, public and individual assistance or just
individual assistance, the taxpayer would qualify to make an election to deduct the casualty loss
in the prior year. MCCARTHY: That's right. Now we've looked at Internal Revenue Code Section
165, now let's discuss Revenue Procedure 2016-53. Revenue Procedure 2016-53 outlines the
procedures and the requirements on how to make the election to deduct casualty losses in the year
prior to the loss. But remember, the election to deduct the casualty loss in the year prior to
the casualty is available only for casualty losses attributable to and located in a federally
declared disaster area only. FALKENSTEIN: Now, in order to make this election, a taxpayer must
include with the original federal tax return or an amended federal tax return an election
statement indicating that the taxpayer is making a Section 165(i) election. And the election
statement must contain the following information. First, the name or a description of the
disaster and dates or date of the disaster which gave rise to the loss, also the address
including whether it's a city, town, county, parish, as well as the state and zip code where the
damaged or destroyed property was located at the time of the disaster. And you will also need
to include the FEMA declaration number, which you can find on the FEMA website. MCCARTHY: The
election to claim disaster losses on the preceding tax year can be made up to six months after
the due date of the taxpayer's federal income tax return, for the year the disaster, for the
year of the disaster without any regard to the extension of time to file. So, for example, if
a casualty loss occurred in 2018, the taxpayer has the option to claim a casualty loss on either
their 2018 or the 2017 tax return. If the taxpayer elects to claim the 2018 casualty loss on
their 2017 tax return, they would have to file a Form 1040X on or before October 16th, 2019.
FALKENSTEIN: And also, even though it rarely happens, taxpayers may revoke the election on or
before that date that is 90 days after the due date for making the election. We encourage you
to look at Revenue Procedure 2016-53 for more on that topic. HENRIE-BROWN: Great. Anna, excuse
me for interrupting, but before we go any further, let's have our fourth and final polling
question. And this is a yes or no question. If a taxpayer suffers a qualifying casualty loss
attributable to a federally declared disaster in 2018, can the taxpayer amend 2017 tax return if
it results in a larger tax benefit? Is this, the answer to this question yes, they can amend
2017 or no? Please click the radio button you believe is the correct response. I'll repeat the
question. If the taxpayer suffers a qualifying casualty loss attributable to a federally
declared disaster in 2018, can the taxpayer amend their 2017 tax return if it results in a
larger tax benefit? Is the answer to this question yes or no? And we'll give you a few more
seconds to respond. Okay. We're going to stop the polling now. And we'll share the correct
response on the next slide. And the correct answer is yes. Taxpayers that suffer a qualifying
casualty loss attributable to a federally declared disaster in 2018 can go back and amend their
2017 tax return claiming the casualty loss in the prior, meaning 2017, year if it results in a
larger tax benefit. So, let's see how many of you got this right. All right. Ninety-one
percent. Great. We're back in the A range. So, Joe and Anna, do you have anything else you'd
like to add? MCCARTHY: Yes, Jennifer, I do. Claiming a 2018 casualty loss on a 2017 tax
return may be particularly beneficial as the standard deduction increased significantly in 2018.
As a result, some taxpayers may obtain a greater tax benefit by amending their 2017 tax return
in order to claim a 2018 qualifying disaster-related casualty loss. So, practitioners who
have clients that fit into this fact pattern might want to take a closer look at Revenue Procedure
2016-53, again, that's Revenue Procedure 2016-53. Okay. Let's move on to a different topic.
How to document a casualty loss. The following slides review the documentation needed to support
a casualty loss claim. This slide covers some of the general information needed in order to
document a casualty loss in a federally-declared disaster area. Some of the records necessary
to document the loss have been destroyed in a disaster. The next few slides will provide some
suggestions on reconstructing records that you may need in the event you're asked to document
your loss. Further, documentation to support a casualty loss claim will likely be needed.
This added documentation will depend on the type asset involved and so some general information
you would need would include the type of casualty like fire, storm, et cetera, when it occurred,
documentation showing the casualty Auto loss was attributable to a federally-declared disaster,
and that you were the owner of the property or if you're a lessee that you are contractually
liable for the damage. Anna, can you give us some examples on how to document type different
types casualty losses? FALKENSTEIN: Sure. So, let's start with documenting a casualty loss
claim related to residential real property, even where some of the records may have been lost due
to the disaster. First, we encourage you to take photographs as quickly as possible after the
event to establish the extent of damage. You may want to see if there's any picture that exists
showing the property before the damage occurred. Contact your title company or a bank that may
have handled the purchase for copies of escrow papers. But probably the best way of documenting
losses is by taking a video of your home both inside and out with a cell phone. MCCARTHY: Now,
we're not saying you should run outside in the middle of a tornado or a volcano eruption to make
a video of your home. Don't do it. FALKENSTEIN: No, don't do that. [Laughter] But there are
some cases where you may have a couple days notice, like when you know that a hurricane is coming
in your direction. Making a video while walking around your house before the disaster strikes
and then making another video after the disaster, that may provide some of the best loss
documentation that you could get for tax purposes and also for insurance purposes. MCCARTHY:
You can also document a casualty loss by using an appraiser. Let's look at this a little
closer. The fair market value of real property both before and after can be documented by an
appraiser. As a possible alternative, check with local real estate companies for a list of
comparable sales to determine the fair market value of comparable properties within the same
neighborhood. Also, the insurance adjusters' reports can be a good source of information for
documenting the extent and damage to the property. Some adjusters' reports will provide
dimensions or floor plan of a residence or other buildings and how much it would cost to replace.
If contractors were used to improve the property in the past, contact those contractors for any
records that might assist you in determining the basis of the property. FALKENSTEIN: So now,
let's look at some additional ways to document casualty losses. You may be able to check with
your county, town, city, or parish assessor's office for records on the property. You may be
able to get a copy of a deed for the property and also for inherited property, you may be able
to check the court records for probate value. These records should help in determining your
basis in the property. For more information on computing basis, we ask that you refer to
Publication 547, Casualties and Disasters. Again, that's Publication 547. Also, you can input
the word "reconstructing" into the word search box on the IRS website for a more detailed
description and information on reconstructing records. Joe are there any other ways to document
casualty losses? MCCARTHY: Yes, there are a few more. When reconstructing records to document
casualty losses for personal property, taxpayers can make a diagram or floor plan of the home
that suffered the casualty and note where objects in the home were placed. For example,
furniture, electronics, clothes, tools, and other personal items. Pictures are also a good way
of documenting the contents of your home. And as we previously stated, if you take a video with
your cell phone, that would be great. Just walk through each room of the house while making the
video. This is one of the best and simplest ways of documenting what you have in the house.
Now, I know that making a video of your house is the first thing that goes through your mind when
a disaster is about to strike, but before and after videos of damaged property is an excellent
way of providing documentary evidence of your losses. You can reconstruct records from original
cost invoices or old sales catalogs. Fair market value can be determined through local thrift
stores, local newspapers, and perhaps the library. Documenting household items is made easier if
photographs or, as I previously stated, videos of the contents of your home can be located. For
example, photographs of furniture, televisions, jewelry, computers, and other electronic devices
as well as appliances, clothing, jewelry, et cetera. Photos are an excellent way of documenting
items that were lost in the disaster. Hey, Anna, did you know that disaster damage does not
always result in casualty loss? FALKENSTEIN: I did know that, Joe. On rare occasions,
disaster-related casualties do result in a gain. I know that sounds odd, but it does happen.
Gains on casualties happen taxpayers receive insurance payments or other reimbursements that
are in excess of the adjusted basis of the property that was damaged or destroyed in a disaster.
The formula for computing a gain on a casualty is as follows, insurance or other proceeds that
were received less the adjusted basis of the asset equals the gain from the casualty. So, a
gain is possible if the insurance or other total reimbursement is greater than the adjusted basis
of property. Reimbursements may include any amount used to pay off an existing mortgage or
other lien against the property. And in certain circumstances, gain may be postponed under the
involuntary conversion provisions of Internal Revenue Code Section 1033, again, that's Internal
Revenue Code Section 1033. Like I said, gains on casualties are rare, but they do exist. So,
we just wanted you to be aware of that possibility. MCCARTHY: Now, if a taxpayer receives an
insurance reimbursement after deducting a casualty loss and if that reimbursement is less than
expected, and accounted for as a casualty loss, include the difference as loss on the tax return
for the year which you can reasonably say you're not going to receive any more insurance
reimbursements. FALKENSTEIN: And if a taxpayer later receives more of an insurance
reimbursement than they expected after they've already claimed a deduction for the deduction
casualty loss, they may have to include the extra reimbursement as income for the year they
received it. However, if any part of the original deduction did not reduce their tax for the
earlier year, do not include that part of the reimbursement in income. Also, do not refigure
your tax for the year that you claimed the deduction. Refer to "recovery" in IRS Publication 525
titled "Taxable and Non-taxable Income" to determine how much extra reimbursement that you may
have to include in your income. Joe, I'm going to let you elaborate a little bit on that.
MCCARTHY: Okay. Thanks, Anna. If a taxpayer has more deductions than income for the year, he or
she may have a net operating loss or NOL. Generally, in computing a net operating loss for an
individual deductions are not, are not attributable, that are not attributable to an
individual trade or business are allowed only to the extent of income not derived from the trade
or business. However, any personal casualty loss for the year that is allowable under the
deduction, I'm sorry, as a deduction under Internal Revenue Code Section 165(c)(2) or (3) is
treated as attributable to a trade or business in determining the amount of the net operating
loss for that year. As a result of this treatment and unlike any other personal deductions an
allowable deduction for a personal casualty loss can generate or increase an individual's
taxpayer's net operating loss for the year. Now, switching topics, the FEMA website contains a
wealth of information on disasters, a list of federally-declared disasters by state and county
are provided on the FEMA website. A direct link is shown on the screen, but the disaster
declarations are easy enough to find if you go to the FEMA website. As we discussed before,
FEMA determines the level of relief provided for every federally-declared disaster area. FEMA
can provide individual assistance, individual and public assistance or public assistance only.
And remember, this is important as it affects the type of relief taxpayers are entitled to.
IRS information on disaster areas can be found at www.IRS.gov/DisasterRelief. This is important
in that when FEMA provides individual assistance, the IRS will generally grant administrative
relief to those taxpayers in those areas receiving individual assistance or individual and
public assistance. After certain disasters, the IRS may provide staffing at major disaster
recovery centers. The IRS will hand out disaster publications, provide information on casualty
loss determinations, assist with questions on tax laws and procedures, assist with records
reconstruction, and assist in obtaining copies of tax returns. FALKENSTEIN: The IRS also has a
wealth of information on the IRS website related to disasters. At the webpage shown on the
screen here, you will find the launch page for the disaster information we've been talking about.
The topics will include the latest guidance for victims of disasters, preparing for disasters
and help for disaster victims. It also has that disaster information specific to individuals
and business. It's a great resource. We highly recommend it. With that, let's go on to review
some of the other resources the IRS offers to victims of disasters and also tax professionals
who deal with disaster-related issues. MCCARTHY: Some of the resources we discussed today are
on screen now. There is the IRS disaster launch page we just talked about as well as IRS
Publication 547, the disaster, the Casualty, Disaster and Thefts guide which is very handy in
understanding disaster-related issues. Also, there is the IRS Publication 584, that's the
Casualty, Disaster and Theft Loss Workbook which is designed to help you figure your loss on
personal use property in the event of a disaster. IRS Publication 2194, the Disaster Resource
Guide, which outlines various resources available to help individuals and businesses who are
disaster victims as well as a handy chart to help you compute casualty losses. Also, there is
Form 4684, that's the Casualties and Thefts form, which is used to compute the amount of a
casualty loss and just as an FYI, the instructions to Form 4684 can be very helpful as well.
Other resources offered by the IRS are the IRS disaster hotline number, which is 866-562-5227.
And in addition, there is IRS Revenue Procedure 2018-8, which covers the safe harbors or
alternative ways for determining the decrease in the fair market value when computing a casualty
loss. And finally, Internal Revenue Code Section 165 and IRS Revenue Procedure 2016-53 which
discussed claiming a casualty loss on the previous year's tax return. One last thing about the
two items, two last items on this list. If you're having trouble sleeping at night, not to
worry, take a gander at one of these, you'll be out cold in no time. Only trained professionals
with years of experience are able to read this material and not pass out from induced boredom.
The rest of these resources, they're okay. Jennifer, with that, it's back to you.
HENRIE-BROWN: Thanks, Joe. Hello, hello again, everyone. This is Jennifer Henrie-Brown
and I'll be the moderator for the Questions and Answers session. And joining our presenters for
today's Q&;A session is Danny Smith, Senior Tax Analyst for IRS Disaster Assistance Emergency
Relief Program. Danny works in our Small Business and Self-Employed Division Human Capital
Office under the Continuity of Operation. Welcome, Danny. =And also joining us for the Q&;A
session is Richard Furlong, who is a Senior Stakeholder Liaison. And like Anna, Joe, and I,
Rich works with tax professionals and small business owners providing outreach and education and
identifying ways the agency can be more responsive to customer needs. But before we begin the
Q&;A session, I should mention that while we may not have time to answer all the questions
submitted during today's web conference, we'll answer as many as time allows. Okay, everyone.
Danny, Richard, Joe, and Anna, we've received several questions. So, let's get started so we
can get to as many as possible. And let me see. I'm going to start with Danny Smith, our
subject matter expert. And we have a lot of questions trying to get clarification of what is a
federally-declared disaster, Danny. And this question specifically asks if the state declared a
disaster that the federal does not, can you still take the tax deduction on your federal return?
DANNY SMITH: Well, thank you, Jennifer, for that question and also for the person who asked
it. And I'll kind of actually step back and face something that's just as an issue right now or
today just in the last hour. FEMA has actually declared Nebraska, with the flooding that's going
on there, a major disaster. The President, let me put it that way, has declared that the State
of Nebraska is a major disaster and in that particular case, they have identified areas within
the state that are going to have individual as well as individual and public assistance.
There's actually nine counties that have individual and public assistance with another 47 just
having public assistance. And there's also several Indian tribes that are under the public
assistance declaration. And the reason I wanted to kind of take it back to that. The way all of
these work, you'll hear it take place time and time again when something like this occurs.
The State, the governor will come out and declare emergencies and actually ask the President
to declare the state an emergency that's beyond their resources. And this particular event
started on March 9th and it's taken until March 21st for the declaration to actually be made, so
there's a time delay in how this normally works. And this was actually an expedited request by
the governor from Nebraska. So, having said that, this is when FEMA actually makes, or the
President makes the declaration and FEMA actually declares the individual counties, that's when
something happens from the federal side, and that's when casualty losses as well as us having
the administrative tax relief takes place. So, if it's only something that the state has done,
it does not warrant our type of relief and there is no casualty that you can take. Now, I will
say something from an accounting standpoint, it is possible that the state itself might provide
something on their state return if they have state income tax. But from a federal standpoint,
there would be nothing that the person would be able to take advantage of. MCCARTHY: And I
just want to add to that and make people aware that FEMA can amend their declarations in the
future. So just because they made a declaration today and outlined certain counties as
receiving public assistance and/or individual assistance, sometimes they can add to that at a
later date, you know, either add to the number of counties that are declared, federally declared
disaster area or change or add types of assistance to that. That's it. HENRIE-BROWN: Wow, that
was a lot of great information. SMITH: Can I go ahead and add on to that? HENRIE-BROWN: Please
SMITH: That our relief, that we will be providing relief for Nebraska based on the individual
assistance declarations for the nine counties, it will be retroactive back to March 9th. So
that's something I always think about, it is March 21st, but we'll go back before March 9th and
that will affect the returns that were due on March 15th, they will actually be postponed until
the end of our relief date. And as Joe said, I can go back and fully tell you that for, I
believe some of the more recent hurricanes, we've had as many as eight amendments to the original
declaration and those amendments have added counties, you know, substantially beyond that. And
every time that those counties are added, and we give our relief, it is retroactive to the
original date of the event, not when we're actually declaring it. HENRIE-BROWN: Now, that was
a wealth of very valuable information, so thank you both Danny and Joe. But to break it down
from what I'm hearing, you pointed out some major points here. Danny, you specifically mentioned
that it sounds like it's done by county. So, the state asked the President for it to be
declared federally-declared disaster because they're trying to get help but it's done by county.
So, the state could have certain counties that are not granted that federally-declared
disaster, is that correct? SMITH: That is correct. And it goes back to the slide that Joe and
Anna had up that actually showed the white counties, those were the counties that were not
impacted or not provided either public assistance or individual assistance. And so, I don't
actually know how many counties there are in Nebraska, but at this point only 56 counties have
been either granted public assistance and individual assistance or public assistance only.
HENRIE-BROWN: But it sounds like it's also a very fluid situation and Joe pointed out that they
can amend what counties are covered. So where can they go for the most up-to-date information
on the current status of what is federally-declared disaster and what is not? MCCARTHY: You want
me to take to take that Danny? SMITH: For the HENRIE-BROWN: Go for it, Joe. SMITH: Yeah MCCARTHY:
Okay. There's two places I would go. Number one is I will go to the FEMA website and that will
show you, they actually have maps like the one we had in the presentation showing you the
disaster area as it stands on that particular day. Like I said, it can be amended at any time.
And that will show you what, what areas are, what counties are in a federally-declared disaster
area and what types of relief are being offered. And separate from that if you go to the IRS
website, we will issue a press release, that will tell you what types of administrative relief
we're being, we're offering those disaster, those affected taxpayers in that disaster area.
HENRIE-BROWN: Great. Danny, did you want to add anything else to that? SMITH: No. I think
Joe's covered everything very well for that. Thank you. HENRIE-BROWN: Well, actually you both
did. I think you did an outstanding job. And another point you, I heard, and correct me if
I'm wrong is that even though there's delay between, you know, the governor asking for this
relief and the President granting it, and I think you mentioned it was asked for back on March
9th and it was granted on the 21st, but we will go back to the March 9th date. Did I understand
you correctly, Danny? SMITH: Yes, that is exactly correct. And I'll give you an even, a
different example because I know this is one of the questions that came out, someone was asking
about Alaska and the earthquake that they had in November of 2018 and whether or not that
qualified. And in fact, it did qualify. They had individual assistance granted in that area and
there was certain, in that case, they had boroughs instead of counties or parishes, they have
boroughs. And I believe three boroughs that obtained relief and that relief, the
declaration itself was not made by FEMA until January 31st, so it was over two months later that
the actual declaration was made by the President and we retroactively went back to 11/30 and
provided the individuals in the affected areas and we do that and that's another question. I'll
just go ahead and try to address that, too. We used the zip codes of the tax returns filed in the
areas. So, if you are in an area that's been impacted, and we provide relief, we're going to use
the zip codes of the people that file tax returns in those areas whether it'd be a business or
individual to code those taxpayers. So, they do not have to do anything. They are
systematically provided the relief. But that's the one thing that Joe talked about are News
Release that we will send out after, or after we provide relief. They will also provide the
disaster phone number that you can call in if you are for some reason your address is not going
to get you the automatic relief, you can call in and self-identify. HENRIE-BROWN: Now, that's
really good because that was, I saw a lot of questions about this regarding the zip code. And
one specifically asked, well, what if you're just a mile away from that zip code. And, Danny, I
think you just answered it. You can actually self-identify by calling the, is it a Disaster
Relief Hotline number and where can I find that? Is that on IRS.gov as well? SMITH: Yes. It's
on our webpage that has all of the up-to-date information that Joe was talking about. You can
go there. It's a 1-800 number and you can self-identify. One of the things that, just think
about it from a normal standpoint, we've had the fires recently and people working in the
hurricane zones afterwards. These individuals get to self-identify also because they are not
being able to do their tax filings because they're working in the areas that have been impacted.
HENRIE-BROWN: Wow. This is a lot of very... MCCARTHY: Can I just add to that?... HENRIE-BROWN:
Yes. MCCARTHY: Because, when you self-identify, if I'm not mistaken, Danny, you're only
self-identifying for the administrative relief. You're not self-identifying for the tax relief.
Is that not correct? SMITH: Correct. You're self-identifying for the administrator relief.
HENRIE-BROWN: OK. Well, thank you. This is a good discussion. So, I do appreciate it. We've
actually answered a number of questions that came up over and over again. So, this is great.
Let me look a little further here because I saw another one I wanted to hit because it was
different. So, here we go. Danny, let me also direct this question to you please. They're
asking, if a taxpayer incurs a casualty loss in a federally declared disaster area, but their
principal resident business is out of the area, can they still claim losses incurred within the
declared area. And I think you said yes if they self-identify. Is that correct? Let me give you
their example. Okay. Go ahead or do you want the examples? He actually gave an example. Let me
read it to you. It says, "For example, a taxpayer is on vacation in California, but their
personal residence is in Texas and their vehicle is destroyed by a wildfire in California that
has been declared a federally declared disaster area. Would they be eligible to claim the loss?"
SMITH: Yes. And I saw that question. I thought it was really a good one. The reality of it is
we give what I was calling systemic relief, where we go in and based on the zip codes where we
know, or we believe the taxpayers to be, provide our administrator relief. But as we kind of
discussed, there's lots of reasons why a taxpayer could be in the affected area. They could be
on vacation. They could be visiting relatives. They could be just working there temporarily.
So, definitely, they would be able to self-identify. HENRIE-BROWN: Great. That's great
information to know, very helpful. Another question for you, Danny, because you are a subject
matter expert, we're taking advantage of you today, your expertise and your knowledge. They're
asking, are the safe harbor provisions available for all disasters? SMITH: And I believe that
was a question that Joe actually answered later in the presentation after he came up that there
is a 2018-08 that actually is a safe harbor. I'm not sure exactly when the date start is
actually one that you can use. But there's safe harbors that definitely are in there for the
duration. There's 2018-09 which was a different one that came out at the same exact time which
had some tables in it, which is not been, at this point, it was only for certain events,
certain disaster events. And while it's been discussed to potentially be used for Hurricane
Michael and let's say Hurricane Florence, it has not at this point been approved for anything
other than that and it's not been extended. MCCARTHY: Let me just to add to that, Revenue
Procedure 2018-8 is available to any disaster that happened in 2018. HENRIE-BROWN: Okay, great.
And for all this information for people who are furiously writing down notes, we have this
information available on IRS.gov, is that correct? MCCARTHY: Sometimes it's available on IRS.gov.
Sometimes, you have more luck looking for the Revenue Rulings and the Revenue Procedures just
by going to the internet. But for like the press releases, for administrative relief, those are
definitely going to the IRS website. And if you want to know where the disaster area is, it's
been claimed, how many counties or boroughs or parishes are affected, I would go to the FEMA
website. HENRIE-BROWN: Okay. Thank you. Danny, let me shoot another question to you if that's OK.
Is county tax assessor valuation valid as a method of valuation? SMITH: I think that's one of
those facts and circumstances questions, more than something you answer yes or no. It would be
definitely a method to utilize I think in any of the ways of determining fair market value. But,
as I know, I live in Florida and the way the tax assessor does things is not necessarily the best
sometimes. So, I think it would be a helpful tool, but I don't know if I rely upon it totally.
MCCARTHY: Let me just add to that Danny, I know that in Connecticut, where I live, they reassess
properties every 10 years. So, even if you had an assessed valuation, it might be dated
differently in Connecticut, they'll have the regular value and then a much lower 70 percent of it
being the assessed value of the property. So, even then, it would reflect the fair market value
of the property even if the house or the building was just reevaluated. So, I personally won't
hang my hat on that, you might want to get a professional appraiser out or get some real estate
individuals involved to do some sort of comparable analysis to determine fair market value.
HENRIE-BROWN: Okay. Well, let me, wonderful having Danny as our subject matter expert. But let
me also utilize our other Stakeholder Liaisons on the call. Richard Furlong, I'm going to
direct this next question to you, if I may. RICHARD FURLONG: Certainly. HENRIE-BROWN: Okay, great.
Thanks, Rich. Okay. And the next question is: Can an individual change their election to go
backward for the tax year 2017 to go forward instead in 2018 for claiming casualty loss? I
guess they're not sure of whether they can have the choice of doing it either or as far as
claiming the loss. FURLONG: Yeah. That's a very good question. And I know Joe talked about the
election for disasters in federally declared disaster areas to go back and elect to treat it as
if the disaster occurred in the prior year. So, let's say you were victimized by one of the major
disasters in calendar year 2018. You ran the numbers. You saw that if you went back and you
amended your 2017 Form 1040 and claimed the casualty deduction in the federally declared
disaster area on the 2017, it could give you a quick refund and perhaps a refund that is both
quicker and larger than you might have in the 2018 return because as Joe mentioned, a very
important point that I think most of us are familiar with following the recent tax law changes is
that with the increase in the standard deduction for beginning in 2018 and over the next seven
years or so, there will be fewer itemizers. And for those who are the focus of today's
presentation which are the individual taxpayers claiming a casualty loss in a federally declared
disaster area, you would still be claiming that on Schedule A, but if you itemize. So, in 2017,
when the standard deduction was approximately half of what it will be in 2018, there will be
perhaps more benefit for those who were victimized by disasters in 2018 to go back and claim it
on the '17 return. But, and that's the lead in, Jennifer, to your question. What if you wanted
to go back and revoke that election to deduct the loss in the preceding year? One can do that
and here again the excellent resource that Anna and Joe mentioned today, Publication 547 has a
section on page 16 about revoking the election to deduct the loss in the preceding year. So,
you could file an amended return for 2017, eliminating the election that you had previously made,
but you have to do that in a time sensitive manner and it has to be filed on or before the date
that is 90 days after the due date for making the election and on or before the date you file any
return or amended return for the year that included the disaster loss. So, that would be 2018.
So, there's specific information again in Publication 547 on page 16. So, that's a long answer
to the question, Jennifer, but, yes, it can be done if all of the requirements are met.
HENRIE-BROWN: That's a great answer and you gave them a resource, too. So, thank you so much,
Rich. Joe, you wanted to add something? MCCARTHY: Yes. You know. Maybe I interpreted the
question differently than Rich. But, my interpretation to the question was if you suffer a
casualty loss in 2018, can you carry that casualty loss to your 2019 tax return and the answer
to that would be no. If you look to Section 165 and you also look to the Revenue Procedure
2016-53 or 2018-53, you'll see that it's only going back to the prior or proceeding year return.
You can't carry it forward to the subsequent year return. HENRIE-BROWN: OK, great, very
thorough. Go ahead, Rich. FURLONG: And that's true. The one area that we didn't get
into today because of its complexities are the impact of casualty losses that might create an
NOL, in other words, a net operating loss. And, Joe, you may have mentioned NOLs and its
mentioned in our publications. If your loss, your loss after factoring in all of the requirements
that Anna and Joe discussed today, the insurance reimbursements, the decrease in the fair market
value, et cetera, that creates an overall loss. Then, then, you have potentially had what is
referred to as an NOL and in certain circumstances. The NOL can be elected to be carried
forward. But that's a topic for another webinar because it is so involved, but absent the
creation of an NOL, you would not, as Joe mentioned, you would not be carrying forward a 2018
casualty loss to calendar year 2019 for 2019 returns. HENRIE-BROWN: Okay. Thank you so much. Here
is a question I'm going to toss out to our other presenter, Anna, and Joe could also answer as
well or anybody for that reason. What if your business is not in the disaster area, but your tax
preparer is? How is that handled? Anna, Joe. FALKENSTEIN: Okay. Sure, I'll take it. MCCARTHY:
Go ahead. FALKENSTEIN: Basically, again if your business was not in the disaster area but your
business records were with the tax preparer, then, you could take some benefit there, you
know especially with some of that administrative relief, if you were able to, but you would
probably have to self-identify in those situations. HENRIE-BROWN: Okay. Well, thank you very
much. That answered that question. Here's an interesting question here. Let me just make sure
we're trying to hit all the ones that people are asking over and over again. Okay. Here's a
common one. So, I'm going to throw this back to our subject matter expert, Danny, if he's
willing to answer it. Here we go. Do you still have to itemize deductions with the new $24,000
standard deduction? I thought the loss was added to any deduction in 2018. SMITH: Well, that
was one of the things that I think Joe and Anna kind of covered, is there's a lot of change going
on in the tax law, as well as, in the casualty loss and the disaster loss area. And if you go
backwards a few years ago, that, for certain events, that might be the case. But as we go
forward, everything is now still an itemized deduction area. And so, you would not, you
basically have to overcome a lot more loss, I guess, to be able to take a dollar's worth of
deduction. So, I hope I answered that correctly. Joe, you want to weigh in? MCCARTHY: Yes. I
want to chime in on this because this is a major point of confusion within the tax practitioner
community and just the tax community in general. There's like four separate types of disaster
related rules. The first one is the pre-2018 rules. That's one. And then, as a subset of the
pre-2018 rules, there is a separate section for 2016 and 2017 disaster losses and then a
separate sub-section which will relates to the Harvey, Irma, and Maria hurricanes and the
California wildfires, and then, separate from that is the 2018 going forward. So, what we
discussed today is only for the 2018 disasters going forward and not those pre-2018 and those two
subsets of 2016, 2017 and Harvey, Irma, and Maria which are, can be totally different rules.
So, whenever you think about adding your disaster casualty losses on top of your standard
deduction, that does not apply for disasters that happen in 2018 going forward to 2025 unless
Congress specifically makes that exception. Those exceptions were made by Congress for certain
losses in 2016 and 2017 specifically with Harvey, Irma, and Maria and the California wildfires.
So, forget all those pre-2017 rules and focus strictly on the 2018 going forward rules and that
will eliminate a lot of the confusion that's out there. FURLONG: And, Joe... MCCARTHY: If I
didn't confuse people even more. HENRIE-BROWN: No. No. No. I think you did a great job, but I
think Rich wants to chime in. Richard? FURLONG: Yeah. Just to add to that, there were some
questions coming in, in addition to the questions about whether or not one still has to itemize
for any personal casualty losses and we've answered that question, yes. But everybody should be
aware that the limitations that I think Anna may have addressed, what was referred to as the
$100 rule, each casualty and theft loss must be reduced by $100. And also, the 10 percent of
AGI rule, those are still applicable for 2018 personal casualty losses in federally declared
disaster areas. And there's a great table in Publication 547, Deduction Limits Rules for
Personal Use Property, that you want to take a look at. So, we did get that question, Jennifer, a
couple of times as to whether or not the new tax law had modified the rules for the 10 percent,
the 100 , what is referred to as the $100 rule and the 10 percent rule and the answer is, no, that
the law has not modified that. MCCARTHY: I just want to add particularly to that, Rich, in that
these rules are just for individuals and individuals only. These rules like the 10 percent, the
$100 and the 10 percent AGI rule and the itemized deduction rules do not apply to business
casualty losses. So, that's very important to the business owners out there. FURLONG: Excellent
point. And, you know, we've had, I think Danny addressed the question about the business property in an
area apart from where the taxpayer lives, there's also a question about a rental property.
Someone had a client or themselves with a rental property in a federally declared disaster area
in North Carolina where there are a lot of beach rental houses, can they, can potentially a
casualty loss be deducted related to the rental property and the answer is yes. On the Form 4684
though, it would be on Section B, business and income producing property and not personally used
property. So, you would want to look at the instructions for 4684 if you're claiming a casualty
loss for either business property and/or income producing property such as rentals.
MCCARTHY: Good point. HENRIE-BROWN: Okay, great, wonderful discussion. Thank you and thanks for all chiming in and
sharing your knowledge and expertise. This is a great discussion. Danny, let me throw another
question back your way. This one is asking are there any special rules that apply to farmers.
SMITH: Now, that's an interesting question. Farmers, you know, are unique in a lot of ways and I don't
know if I want to try to touch that one because of they are, you know, it is a business being in a farm
and, you know, typically, there's a lot of different things that come out with relief that they're given due
to droughts, you know, that you don't normally see in everything else. With this flooding, I know most of
it is going to be impacting farmers. So, I don't think I want to address that too much just
because of my limited knowledge with the farming aspect of it. HENRIE-BROWN: Okay. Thank you.
Let's go on to another question. There is a publication out there, I think it's 225, you can
find it on IRS.gov, directed to farmers. But of course, for the most up to date information, you
want to go to the Disaster Assistance webpage on IRS.gov and FEMA as both Joe and Danny pointed
out before. Okay. Let me go on to another question here. We've answered a lot of these questions
because we came up with the same questions over and over again. So, this is great. Let's see.
Here's an interesting question. Danny, if I may direct it to you, it says, if you live in a
State or area where hurricanes or other types of natural disasters that happen from to time to
time, natural for that happens according to them, would that still be unexpected? SMITH: I think
that's a great question given that I live in Florida and were, you know, I've been blessed to have two hurricanes
come by my house twice in the last two, three years. I, it, would seem like it may be something
that would not be casualty because it's not sudden and unexpected, but the reality of it is it
does fit. It's just amazing, you know, the areas that flood right now are areas that continuously seem
like they flood every so many years. But, fortunately, I guess from the standpoint of the tax
code, those are still considered casualties. HENRIE-BROWN: Okay, great information. Thank you for
clarifying that. And I'm going to ask a question of our presenters again, Anna and Joe, if
you'll go ahead and answer this question, it'd be appreciated. They're asking, "Does "Where's
my Refund?" work with someone who has filed a return with an insured spouse?" Anna, can you take
that one for us? FALKENSTEIN: I apologize. I was having trouble with my mute button.
HENRIE-BROWN: That's Okay. FALKENSTEIN: Well, unfortunately, we're talking disaster today. We're
not really talking injured spouse and I'm not really sure what that has to do with disasters.
So, I'm going to defer on that question at this point, but I really don't think so.
HENRIE-BROWN: Okay. Well, sorry I asked that question. It looked like somebody had wanted it to
be asked. So, that's why I asked it. Okay. Let's move on then. With the new tax law, it will be
more difficult to itemize a casualty loss than in past years. And they're asking how, isn't
that the case, then is there any other option to take the casualty loss or do you have to
itemize, and I'll direct that question to Richard. FURLONG: Excellent question and I think we've
looked at variations on this topic because certainly the Tax Cuts and Jobs Act, the new tax
law, has a significant impact on personal casualty losses. The first one that was mentioned in
the presentation is that now if you are claiming a casualty loss in your 1040 for personal use
property, you must include the FEMA designation, the FEMA disaster declaration number and that's
right at the top of the front page of Section A of the Form 4684. But the other point is that
obviously the IRS is going to see a material reduction in the number of Schedule As we filed
this year because those who, and those deductions of Schedule A obviously are things like most
common mortgage interest, state and local income and property taxes, charitable contributions,
casualty losses, again, with the caveat that they have to be in a federally declared disaster
area beginning in 2018 for personal use property. So, yeah, you could have a situation where
because when you itemize your deductions including any allowable casualty loss calculated on the
4684 Form and then carried over to Schedule A, you are still below the standard deduction
whereas if the casualty had occurred in 2017, you might have been over it. So, this is to the
very important point that Joe McCarthy made earlier where you want to look closely that if you
elect to amend your 2017 return and do it timely and claim the loss, the allowable loss on the
'17 return for the casualty that occurred in 2018, you could get a tax benefit that you could
not otherwise get on 2018. So, it requires some judicious planning by the impacted, tax,
taxpayer and perhaps their tax professional. So, Joe, would you agree with that? MCCARTHY: Yes. HENRIE-BROWN:
No. No. No. That's it. That's all the time we have for questions. I'm sorry, folks. We go
on for hours, but we ran out of time. I want to thank Danny Smith and Richard Furlong for
joining us and sharing their knowledge, expertise and answering your questions. And, Anna and
Joe, before we close the Q&;A session, what are the most important points you want the attendees
to remember from today's webinar? FALKENSTEIN: I'll go first. The key points that we hope that
you'll take away from this presentation are that there are two different types of relief for
disaster victims. The first one is administrative relief and the second is tax relief.
Administrative relief is the granting of additional time to file tax returns like a 1040 or to
pay taxes like estimated taxes or something like paying or contributing to your qualified
retirement plan a little later than you normally do. Now, tax relief, a little bit different, on
that hand, we're looking at claiming the casualty loss on a tax return and then you would then
determine whether you're going to do it in the current year or go back to the prior year. Joe,
over to you. MCCARTHY: Okay. The type of FEMA assistance provided to a disaster area is generally
determined by the type of relief either administrative relief and/or tax relief. So, public
assistance only qualifies for tax relief. Individual assistance qualifies for administrative
relief and tax relief and individual and public assistance also qualifies for administrative
relief and tax relief. I know we covered a lot of information some of which was pretty complex,
but we hope you walk away with a better understanding of the tax benefits available to victims of
federally declared disasters. One last thing, the Tax Cuts and Jobs Act provide that for
taxable years 2018 to 2025, personal casualty losses are deductible only to the extent they are
attributable to a federally declared disaster. In addition, the procedures on how to make the
casualty loss claim have also changed. Starting in 2018 with claiming a casualty loss of the tax
return, the payment disaster declaration number is now required to be entered on Form 4684 and
you can find that four-digit FEMA disaster declaration number on the FEMA website. Now, I want to
reemphasize that these rules do not, I repeat, do not apply to business. Let me repeat that one
more time. These casualty losses do not apply to businesses. So, businesses can still claim
casualty losses regardless of whether they're in a federally declared disaster area or not.
Jennifer, it's all yours. HENRIE-BROWN: Thanks, Joe, and thanks again to both our presenters,
Joseph McCarthy and Anna Falkenstein for providing important information and updates on tax
relief for disasters and also for Danny Smith and Richard Furlong for helping answer the
questions. Thank you all so much. If you attended today's web conference presentation for at
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