IRS Issues Relief for Victims of Hurricane Sandy
Author: Scott Humphrey
On October 29, Hurricane Sandy made landfall in Connecticut, New Jersey, New York and Rhode Island. The storm left many without electricity, food, shelter and transportation and caused billions in damages. Recently, the IRS provided guidance and relief to taxpayers affected by Hurricane Sandy.
Extension of Filing & Payment Deadlines
Taxpayers residing in federally declared disaster localities in Connecticut, New Jersey, New York and Rhode Island have been automatically granted payment and filing relief. The IRS postponed various tax filing and payment deadlines that occurred in late October. The IRS extended the fourth-quarter estimated tax payment date for individuals until February 1, 2013, as well as third- and fourth-quarter payroll and excise tax returns and accompanying payments for businesses. The IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due October 26 (or 27 depending upon the disaster area start date) and before November 26 if the deposits are made by November 26, 2012. In addition, the IRS also provided relief for the Form 990 series, i.e., tax-exempt entities, with an original or extended due date between October 26 and February 1, 2013. These returns now have a due date of February 1, 2013.
Taxpayers working outside of the disaster area whose books, records or tax professionals are located in areas affected by Hurricane Sandy are encouraged to contact the IRS for assistance by calling 866.562.5227.
Qualified Disaster Treatment of Payments to Victims
The IRS announced to employers and other taxpayers that qualified disaster relief payments made to individuals affected by Hurricane Sandy are excluded from the individuals’ taxable income. Qualified disaster relief payments include reimbursements to pay reasonable and necessary personal, family, living or funeral expenses not reimbursed by insurance. Qualified disaster relief payments also include amounts paid to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or replacement of its contents to the extent not reimbursed by insurance. Documentation requirements for the expense reimbursements are relaxed, assuming the payments are reasonably expected to be in line with the expenses occurred.
Leave-Based Donation Programs
Employers may consider adopting a program in which vacation pay can be donated toward the benefit of relief work for Hurricane Sandy. Similar programs were set up in the wake of 9/11 and Hurricane Katrina. Under this type of program, the employer would make a payment to a charitable organization (as defined by Internal Revenue Code Section 170) for the benefit of Hurricane Sandy victims by January 1, 2014, in exchange for an employee’s vacation, sick or personal leave that has been earned but not paid by the employer. The employee would not recognize income for this contribution, nor will they be able to claim a charitable contribution deduction for the payment. The employer would be able to deduct the cash payments as either a charitable contribution or an ordinary and necessary business expense.
Hardship Distributions from Retirement Plans
On November 16, the IRS announced that hardship distributions and loans can be made to victims of Hurricane Sandy and their family members from employer-sponsored retirement plans, including 401(k), 403(b) and 457(b) plans. Distributions and loans will be allowed before a plan is formally amended to provide this option. A plan also can allow for hardship payments before the plan participant provides documentation to substantiate the expenses if required by the plan. Finally, the normal six-month ban on contributions to 401(k) and 403(b) plans following a hardship withdrawal will not apply.
For more information on these provisions, contact your BKD advisor.