As Dorian threatens and with the peak of hurricane season just ahead, the Internal Revenue Service posted a reminder to everyone to develop an emergency preparedness plan. Taxpayers, whether individuals, organizations or businesses, should take time now to create or update their emergency plans.
Taxpayers can begin getting ready for a disaster with a preparedness plan that includes securing and duplicating essential documents, creating lists of property and knowing where to find information once a disaster has occurred.
Secure key documents and make copies
Taxpayers should place original documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space. Duplicates of these documents should be kept with a trusted person outside the area a natural disaster may affect. Scanning them for backup storage on electronic media such as a flash drive is another option that provides security and easy portability.
Employers should check fiduciary bonds
Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider. The IRS also encourages employers to create an EFTPS.gov account where they can monitor their payroll tax deposits and sign up for email alerts.
Claiming a casualty loss deduction – documenting valuables and reconstructing records
1. Document valuables before the disaster
Taking photographs or videos of a home or business’s contents can help support claims for insurance or tax benefits after a disaster strikes. All property, especially expensive and high value items, should be recorded. The IRS disaster-loss workbooks can help individuals (PDF) and businesses (PDF) compile lists of belongings or business equipment.
2. Begin reconstructing your records as soon as possible after the disaster
Personal Residence/Real Property
- Be sure to take photographs as quickly as possible after the casualty to establish the extent of the damage. Take photos of specific valuable items if possible, rather than just a general picture of the damage. This will help establish the extent of damage to your personal items.
- Contact the Title Company, Escrow Company, or bank that handled the purchase to obtain copies of escrow papers. Your real estate broker may also be able to help.
- Use the current property tax statement for land vs. building ratios, if available; if not available, get copies from the county assessor’s office.
- Check with appraisal companies to locate a library of old multiple listing books. These can be used for “comps” to establish a basis or fair market value. “Comps” are comparable sales within the same neighborhood.
- Check with your mortgage company for copies of any appraisals or other information they may have about cost or fair market value.
- Tax records – Immediately after the casualty, file Form 4506, Request for Copy of Tax Return, to request copies of the previous four years of federal income tax returns. To obtain copies of the previous four years of transcripts you may file a Form 4506‐T, Request for Transcripts of a Tax Return. Write the appropriate disaster designation, such as “HURRICANE HARVEY,” in red letters across the top of the forms to expedite processing and to waive the normal user fee.
- Improvements – Call the contractor(s) to see if records are available. If possible get statements from the contractors verifying their work and cost.
- If a home improvement loan was obtained, obtain paperwork from the institution issuing the The amount of the loan may help establish the cost of the improvements.
- Inherited Property – Check court records for probate values. If a trust or estate existed, contact the attorney who handled the estate or trust.
- No other records are available – Check at the county assessor’s office for old records about the property. Look for assessed value and ask for the percentage of assessment to value at the time of purchase. This is a rough guess, but better than no records at all.
Vehicles
Kelly’s Blue Book, NADA, and Edmunds are available on‐line and at most libraries. They are good sources for the current fair market value of most vehicles on the road.
- Call the dealer and ask for a copy of the contract. If not available, give the dealer all the facts and details and ask for a comparable price figure.
- Use newspaper ads for the period in which the vehicle was purchased to determine cost basis. Use ads for the period when it was destroyed for fair market value. Be sure to keep copies of the ads.
- If you are still making payments, check with your lien holder.
Personal Property
The number and types of personal property may make it difficult to reconstruct records. One of the best methods is to draw pictures of each room. Draw a floor plan showing where each piece of furniture was placed. Then show pictures of the room looking toward any shelves or tables. These do not have to be professionally drawn, just functional. Take time to draw shelves with memorabilia on them. Do the same with kitchens and bedrooms.
Reconstruct what was there, especially furniture that would have held items — drawers, dressers, and shelves. Be sure to include garages, attics, and basements. Here are some examples of ways that you can prove the value of your personal property:
- Get old catalogs. These catalogs are a great way to establish cost basis and fair market value. Check the prices on similar items in your local thrift stores to establish fair market value. Walk through the stores and look at comparable items, especially items such as kitchen gadgets. Look for odds and ends you may have had but forgotten because of infrequent use.
- Use your local “advertiser” as a source for fair market value. Keep copies of the issues handy and copy pages used for specific items to put with your tax records file on the disaster.
- Check local newspaper want ads for similar items. Again keep a copy of any you use for comparison with the tax
- If you bought items using a credit card, contact your credit card company.
- Check with your local library for back issues of newspapers. Most libraries keep old issues on microfilm. The sale sections of these back issues may help establish original costs on items such as appliances.
- Go to a used bookstore with a tape measure and the diagram of the destroyed property. Measure several rows of used books and count the number of books per shelf. Add up the prices of those books and determine an average cost per shelf. Then count the number of shelves you had in your home and multiply by the average cost per shelf. This will help determine the value of your books before the loss.
Business Records
- Inventories – Get copies of invoices from suppliers. Whenever possible, the invoices should date back at least one calendar year.
- Income – Get copies of bank statements. The deposits should closely reflect what the sales were for any given time period.
- Obtain copies of last year’s federal, state, and local tax returns including sales tax reports, payroll tax returns and business licenses (from city or county). These will reflect gross sales for a given time period.
- Furniture and fixtures – Sketch an outline of the inside and outside of the business location. Then start to fill in the details of the sketches. (Inside the building — what equipment was where; if a store, where were the products/inventory located. Outside the building — shrubs, parking, signs, awnings, etc.)
- If you purchased an existing business, go back to the broker for a copy of the purchase agreement. This should detail what was acquired.
- If the building was constructed for you, contact the contractor for building plans or the county/city planning commissions for copies of any plans.
3. File an Insurance Claim
The IRS requires you to file a timely insurance claim first and then take a casualty loss deduction for any loss that is not covered. The IRS will disallow your casualty loss deduction if you fail to make a timely insurance claim.