From the IRS
In response to the extraordinary damage caused by Hurricane Sandy and the extreme need for relief, the IRS announced various tax relief measures for individuals and businesses affected by Hurricane Sandy in Connecticut, New Jersey, New York, and Rhode Island. The relief applies to taxpayers in areas in those states declared a disaster area by the Federal Emergency Management Agency (FEMA). The IRS said other locations may be added based on additional damage assessments by FEMA.
The IRS is postponing various tax filing and payment deadlines starting in late October, giving affected taxpayers until Feb. 1, 2013, to file these returns and pay any taxes due. The relief applies to most tax returns, including individual, corporate, and estate and trust income tax returns; partnership returns; S corporation returns; trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns that had an original or extended due date on or after Oct. 26, 2012, and before Feb. 1, 2013. The postponed deadlines include those for fourth quarter individual estimated tax payments, normally due Jan. 15, 2013. Also postponed are the deadlines for payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012, and Jan. 31, 2013, respectively. The postponement also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.
As this item went to press, IRS filing and payment relief applied to the following localities:
- Connecticut: Fairfield, Middlesex, New Haven, and New London counties and the Mashantucket Pequot Tribal Nation and Mohegan Tribal Nation located within New London County;
- New Jersey: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union, and Warren counties;
- New York: Bronx, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk, and Westchester counties;
- Rhode Island: Newport and Washington counties.
The IRS announced that it will also abate any interest and late-payment or late-filing penalties that would otherwise apply. The IRS also waived failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster area start date and before Nov. 26, if the deposits were made by Nov. 26, 2012.
The IRS is allowing taxpayers who have been adversely affected by Hurricane Sandy to take hardship distributions or loans from their retirement plans (Announcement 2012-44). To qualify under the announcement, hardship distributions made on account of a hardship resulting from Hurricane Sandy must be made on or after Oct. 26, 2012, and no later than Feb. 1, 2013. Under the announcement, a qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan or a hardship distribution for a need arising from Hurricane Sandy to an employee or former employee whose principal residence on Oct. 26, 2012, was located in one of the counties or Tribal Nations that have been identified as covered disaster areas because of the devastation caused by Hurricane Sandy. The relief also applies to employees whose place of employment was in one of these counties or Tribal Nations on that date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties or Tribal Nations on that date.
The relief applies automatically to any taxpayer located in the disaster area, and taxpayers do not need to contact the IRS to get the relief.
The IRS also announced that it is waiving the low-income housing tax credit rules that prohibit owners of low-income housing from providing housing to victims of Hurricane Sandy who do not qualify as low-income (Notice 2012-68). The local agency with jurisdiction over the project will determine the appropriate period for this temporary relief to apply for each project, but the temporary housing period will not extend beyond Nov. 30, 2013.
The IRS did not postpone the due dates for regular federal tax deposits. However, the IRS noted that if taxpayers or tax practitioners receive a penalty notice for this period, they can contact the IRS at the number on the notice to request penalty abatement due to reasonable cause on account of the storm.
The IRS also announced it is willing to work with any taxpayer who resides outside the disaster area but whose books, records, or tax professional are located in areas affected by Hurricane Sandy. Also, all workers assisting the relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are eligible for relief.
The IRS has told taxpayers who live outside of the affected areas and think they may qualify for relief that they must contact the IRS at 866-562-5227.
Qualified Disaster Treatment of Payments to Victims
The IRS also alerted taxpayers that Hurricane Sandy is designated as a qualified disaster for purposes of Sec. 139, and qualified disaster relief payments made to individuals by their employer or any person can be excluded from those individuals’ taxable income.
Qualified disaster relief payments are defined by Sec. 139 as amounts paid:
- To or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses (not otherwise compensated for by insurance or otherwise) incurred as a result of a qualified disaster, or
- To reimburse or pay reasonable and necessary expenses (not otherwise compensated for by insurance or otherwise) incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.
The designation of Hurricane Sandy as a qualified disaster means that employer-sponsored private foundations may provide disaster relief to employee-victims in areas affected by the hurricane without affecting their tax-exempt status.
The IRS also released guidance for employers who are considering adopting leave-based donation programs to aid the storm’s victims (Notice 2012-69). A leave-based donation program allows employees to forgo vacation, sick, or personal leave in exchange for cash payments by the employer to a charity. The IRS allowed favorable tax treatment for similar programs in the wake of Hurricane Katrina in 2005.
Under Notice 2012-69, the IRS will not treat as gross income or wages of the employees any cash charitable donations made by their employer to a Sec. 170(c) organization in exchange for vacation, sick, or personal leave that the employees elect to forgo. The payments must be made to a Sec. 170(c) organization for the relief of victims of Hurricane Sandy and be paid before Jan. 1, 2014.
However, employees who forgo leave under such a program will not be allowed to take a charitable deduction for the value of the forgone leave excluded from their compensation.
The IRS will allow employers to deduct these cash payments either as charitable contributions or gifts under Sec. 170 or as trade or business expenses under Sec. 162.
Employers who make cash payments to which Notice 2012-69 applies do not need to report them in Box 1, 3 (if applicable), or 5 of an employee’s Form W-2, Wage and Tax Statement.