With so many people whose lives were disrupted by the California wildfires, it is welcome relief that the Federal and State Tax Agencies are providing extra time to taxpayers to meet their tax obligations.
Internal Revenue Service (“IRS”)
The IRS announced that victims of wildfires ravaging parts of California now have until January 31, 2018, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out Monday, October 16, 2017.
Currently, the IRS is providing relief to seven California counties: Butte, Lake, Mendocino, Napa, Nevada, Sonoma and Yuba. Individuals and businesses in these localities, as well as firefighters and relief workers who live elsewhere, qualify for the extension. The agency will continue to closely monitor this disaster and may provide other relief to these and other affected localities.
The tax relief postpones various tax filing and payment deadlines that occurred starting on October 8, 2017. As a result, affected individuals and businesses will have until January 31, 2018, to file returns and pay any taxes originally due during this period.
This includes the January 16, 2018 deadline for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until October 16, 2017. However, any payment that was due with the extension filed on April 18, 2017 but not paid until later will still be subject to a late-payment penalty.
A variety of business tax deadlines are also affected, including the October 31, 2017 deadline for quarterly payroll and excise tax returns. Calendar-year tax-exempt organizations whose 2016 extensions run out on November 15, 2017 also qualify for the extra time.
In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due after October 8, 2017 and before October 23, 2017, if the deposits are made by October 23, 2017.
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, it would be necessary to contact the IRS to have the penalty abated.
The IRS will also work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. An example would be where the taxpayer’s representative is located in an affected area and is unable to help the taxpayer-client meet a tax deadline.
Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year) or the return for the prior year (2016). See Publication 547 for details.
For a complete list of all disasters besides the recent California wildfires, see the IRS disaster relief webpage.
Franchise Tax Board (“FTB”)
The FTB announced that affected taxpayers are granted an extension to file 2016 California tax returns and make payments until January 31, 2018.
Taxpayers may deduct a disaster loss for any loss sustained in California that is proclaimed by the Governor to be in a state of emergency. For a complete list of all disasters, see the “Qualified Disasters” chart on FTB’s Disaster Loss webpage. This disaster page also has information on extended deadlines, filing instructions, and obtaining free copies of state returns.
In addition, the FTB automatically follows federal postponement periods for any presidentially declared disasters, the most recent being Hurricanes Harvey, Irma and Maria. So a taxpayer who earns income in California can show that Hurricane Harvey impacted him or her, that taxpayer has extra time to file a California tax return.
Importance To Preserve Records
Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.
Essential Records to Have for a Tax Audit
If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.
We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper. By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.
So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:
- Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
- Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
- Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
- Written letters from charities confirming your monetary donations from the previous year.
- Receipts for business expenses you claimed.
- Mileage Logs for business use of vehicle.
- Entertainment and Travel Logs for business activities.
Develop And Implement Your Backup Plan
Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.
The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people minimize or avoid adjustments from IRS audits. Working with a tax attorney is the best bet for minimizing adjustments that would create liability to the IRS.