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All too often we turn on the news and hear of yet another disaster affecting hundreds of thousands of people and businesses. These disasters can upend every aspect of an affected individual’s life, including damage or destruction to their home, business, and critical documents. To assist taxpayers, the President may declare the event a federal disaster, which allows the federal government to help affected taxpayers under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Once this declaration has been made, the IRS will often provide these taxpayers with certain relief, most commonly by exercising its authority under IRC § 7508A to postpone certain tax deadlines, including filing and payment deadlines.
When taxpayers need more time beyond the postponed filing deadline, they can of course file for an extension, but might be surprised to learn that they cannot file for this extension electronically, in certain circumstances. For example, taxpayers will only be able to file an extension electronically on or before the statutory date on which the return is due because limitations of the IRS’s current systems don’t allow for the electronic filing of extensions beyond the statutory filing deadline. In other words, if taxpayers file for an extension during the period of postponement, they will have to file the request for an extension of time to file on paper rather than electronically.
Three recent examples: Earlier in the year, the IRS postponed deadlines for filing tax returns and making tax payments for taxpayers affected by severe weather in parts of Alabama, California, and Georgia. (Postponements for these affected areas began the day of the weather event and run through May 15, 2023.) However, if these taxpayers wanted to submit a filing extension after the original due date (March 15, 2023 for corporate returns and April 18, 2023 for individual returns), they would have to submit a paper Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, or a paper Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The last three years have taught us that the inability to file forms electronically is both inconvenient for taxpayers and burdensome for the IRS.
Good news: The IRS issued updated disaster declarations for parts of Alabama, California, and Georgia, eliminating the requirement for the affected taxpayers to file extension requests; thereby giving taxpayers until October 16, 2023 to file their returns and pay their estimated taxes. This is favorable to taxpayers and eliminates the need to file for an extension.
On February 23 & 24, 2023, the IRS updated three prior declarations (AL-2023-01, CA-2023-02, and GA-2023-01). The updated declarations provide the affected taxpayers additional time to file returns due on March 15, 2023 and April 18, 2023, until October 16, 2023, without having to file for an extension, and avoid the need to file for a possible extension on paper. The IRS also postponed the deadline for these affected taxpayers to make estimated tax payments until October 16, 2023. I appreciate the IRS’s willingness to create a favorable solution to a software programming challenge and eliminate unnecessary paper filings. As the IRS moves to modernize and update its technology, I’m hoping it will develop a permanent solution to its system limitations or consider providing a postponement consistent with the extension period for future filing season disasters thus improving the taxpayer’s filing experience and eliminating foreseeable challenges.
Words of Caution: Because the October 16, 2023 date is a postponed filing deadline and not an extension, it may result in the denial of a taxpayer’s claim for credit or refund three years down the road. I raised this issue in the 2023 National Taxpayer Advocate Purple Book where I recommended that Congress amend the Internal Revenue Code to make the tax system simpler and fairer for taxpayers. When taxpayers take advantage of this postponed period, there will be a mismatch between the three-year lookback rule of IRC § 6511(b)(2)(A) and the date payments were made (or deemed made), because the October 16, 2023 date is not an extension, but rather a postponement. Thus, the postponed time period (April 18-October 16, 2023) will not be considered when calculating the lookback period. (The three-year lookback period limits the amount of credit or refund that can be claimed to amounts paid in the three years preceding the filing of the claim, including any period of extension.) For more details, see my 2021 blog, Claims for Refunds: 2019 and 2020 Tax Year Trap for the Unwary, and the legislative recommendation in the 2023 Purple Book, Amend the “Lookback Period” to Allow Tax Refunds for Certain Taxpayers Who Took Advantage of the Postponed Filing Deadlines Due to COVID-19.
As I mentioned in yesterday’s blog, I am pleased that the IRS addressed this mismatch problem for claims for credit or refund for taxpayers who filed timely returns for 2019 or 2020 during the periods of postponement granted by the IRS. See Notice 2023-21. However, this relief only extends to the postponement of filing deadlines for 2019 and 2020 but does not address the problem going forward for future disaster declaration postponements of filing deadlines – such is the case here. Considering how often the IRS exercises its authority under IRC § 7508A to postpone filing deadlines, it is crucial that the IRS consider granting a postponement of the lookback rule simultaneous with the filing postponement or issue guidance to permanently solve this mismatch between the date payments are made (or deemed made) and the three-year lookback period.
When a taxpayer has suffered damage to their property attributable to a federally declared disaster, one type of relief that is available is being able to deduct a casualty loss on their tax return. For example, a casualty loss occurs when an individual’s home is damaged in a hurricane or mudslide, allowing them to claim a casualty loss deduction for the cost of repairing or replacing their property. This can provide much needed relief for individuals or businesses who may struggle financially as a result of the disaster, and can help taxpayers with the financial burden of having to repair or replace damaged property. This deduction is also beneficial to both the uninsured and those taxpayers whose insurance does not cover the sustained damage to property. Note for more information on the deductibility of casualty losses, see Publication 4512-C, and for information on the different types of casualty losses, and the requirements for deducting each one, see IRS Publication 547, Casualties, Disasters, and Thefts.
If a taxpayer sustained a loss between 2018 and 2025 that is attributable to a federally declared disaster, they may deduct the loss in either the year the loss occurred or the prior year. (Generally, a casualty loss not attributable to a disaster is allowed as a deduction only for the tax year in which the loss was sustained.) This allows taxpayers ultimate flexibility, as it may take some time for them to assess the damage and determine the total amount of the loss, but allows them to obtain the tax benefits as soon as the amount can be determined by allowing them to claim the deduction in the year prior to the disaster.
When taxpayers want to claim the loss in the year prior to the disaster, but they have already filed a return, they will need to file an amended return for that year (IRS Form 1040-X, Amended U.S. Individual Income Tax Return) claiming the loss. This election must be made within six months from the due date of the tax return for the year in which the federally declared disaster occurred. (This does not include any extension of time to file. See Treas. Reg. § 1.165-11T(g).) To make this election, they must complete and attach Form 4684, Casualties and Thefts, to the amended return. If taxpayers later want to revoke this election to claim the loss in the year of the disaster, they must file an amended return revoking the casualty loss election, and recalculate the tax liability as a result of the revocation. Additionally, the amended return must contain a “revocation statement”, which includes:
This revocation must be sent in no later than 90 days from the due date for taking the election for the casualty loss in the prior year. (For more details, see Rev. Proc. 2016-53.) You must pay (or make arrangements to pay) any tax and interest due as a result of the revocation.
The rules for claiming casualty losses attributable to federally declared disasters offer taxpayers more flexibility when compared to the rules for non-disaster related casualty losses. Yet there are critical actions and time periods which taxpayers must follow, and it’s important that taxpayers are aware of these rules so they can consider the options and choose the one which may be most advantageous for their circumstances.
Disasters can be a difficult and emotional experience for individuals, families and business owners. By understanding the options for relief through IRS disaster declarations, individuals and business owners can make informed decisions about their filing and payment obligations, finances, and tax liabilities. The updated declarations give taxpayers in affected areas more time to comply with their tax obligations without having to file Form 4868 or Form 7004, more time to make their estimated tax payments, and also prevents the IRS from having to use its resources to process paper extension forms. In addition, the casualty loss deduction gives taxpayers flexibility they need to claim the deduction when it is most advantageous to them. Assisting taxpayers in a difficult time is a welcome relief but I am concerned that three years from now taxpayers and practitioners will be surprised to learn that refund claims filed later in 2026 may be disallowed under the lookback period required by the Internal Revenue Code. However, this is an area that Congress can fix to prevent the unintended consequences for potential tens of millions of taxpayers for all disaster relief. The IRS should also consider issuing regulations. Otherwise, it will have to fix the lookback issue one disaster at a time.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.