Hurricane Harvey has devastated parts of Texas, and many victims are left unable to fulfill tax responsibilities and perform tax-related tasks. The IRS is responding by offering victims of Hurricane Harvey additional time to complete those tasks.
IRS Relaxes Retirement Plan Rules
The IRS announced that employer-sponsored retirement plans (such as 401(k)s) can make loans and hardship distributions to Hurricane Harvey victims and their families.
Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of streamlined loan procedures and liberalized hardship distribution rules. IRA participants are barred from taking out loans, but they may be eligible to receive distributions under liberalized procedures.
Retirement plans can provide this relief to employees and certain family members who live or work in disaster area localities affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency. To see a list of affected counties in Texas, visit this IRS page. Qualified hardship withdrawals must be made by January 31, 2018.
The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants can access their money more quickly with a minimum of red tape.
This broad-based relief means that a retirement plan can allow a Hurricane Harvey victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s plan. It also means that a person who lives outside the disaster area can take a plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.
Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, a plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. Plans that require certain documentation before a distribution is made can relax this requirement as described in IRS Announcement 2017-11.
The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they’re repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10% early-withdrawal tax.
“This has been a devastating storm, and the IRS will move quickly to provide tax relief to hurricane victims,” said IRS Commissioner John Koskinen.
“The IRS will continue to closely monitor the storm’s aftermath, and we anticipate providing additional relief for other affected areas in the near future.”
Hurricane Harvey victims in affected parts of Texas now have until January 31, 2018, to file certain individual and business tax returns and make certain tax payments, the IRS announced.
This includes an additional filing extension for taxpayers with valid extensions that run out on October 16, 2017, and businesses with extensions that run out on September 15, 2017.
The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency, as qualifying for individual assistance. Click here for a current list of counties. However, taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.
Relief for Affected Individuals
The tax relief postpones various tax filing and payment deadlines that occurred starting on August 23, 2017. As a result, affected individuals and businesses will have until January 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes the September. 15, 2017 and January. 16, 2018 deadlines 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. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.
Relief for Affected Businesses
A variety of business tax deadlines are also affected including the October. 31 deadline for quarterly payroll and excise tax returns. In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after August 23 and before September 7, if the deposits are made by September 7, 2017. Details on available relief can be found on the disaster relief page on IRS.gov.
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, the taxpayer should call the number on the notice to have the penalty abated.
In addition, the IRS will 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.
Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.
A Choice on When to Claim
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).
The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.
For information on government-wide efforts related to Hurricane Harvey, please visit: https://www.usa.gov/hurricane-harvey.
Eric Cohen, CPA is the President and Founder of E. Cohen and Company CPAs, a full-service CPA firm serving nonprofit organizations, government contractors, professional service companies and other industries with audit, tax and business advisory services for over 26 years. The firm was commended as a SmartCPA Reader’s Choice by SmartCEO magazine and a “Best Accounting Firm to Work For” by AccountingToday magazine. For more information, visit www.ecohencpas.com or call 301-917-6200.