IRS Grants Tax Relief to Hurricane Victims; Retirement Plan Rules Relaxed

(Parker Tax Publishing September 2017)

The IRS announced that Hurricane Irma victims have until January 31, 2018, to file certain individual and business tax returns and make certain tax payments. The IRS also announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. IR-2017-150; Announcement 2017-13.

SAMPLE CLIENT LETTERS: For a sample client letter explaining Hurricane Harvey tax disaster relief, see Hurricane Harvey Tax Relief For a similar letter explaining Hurricane Irma relief see Hurricane Irma Tax Relief

Extensions for Individual and Business Tax Returns and Tax Payments

The IRS is granting automatic extensions of time to file tax forms to individuals and businesses affected by Hurricane Irma. The IRS announced that hurricane victims in parts of Texas have until January 31, 2018, to file certain individual and business tax returns and make certain tax payments. The tax relief granted by the IRS includes an additional filing extension for taxpayers with valid extensions that run out on October 16, and businesses with extensions that run out on September 15.

The IRS is offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. As of press time, this relief covers all 67 Florida counties, the islands of St. John and St. Thomas in the U.S. Virgin Islands, and the municipalities of Culebra, Vieques, Canovanas and Loiza in Puerto Rico.

Taxpayers in other localities added later to the disaster area listing will automatically receive the same filing and payment relief. The list of eligible localities is available on the disaster relief page on IRS.gov/newsroom/help-for-victims-of-hurricane-irma.

The tax relief postpones various tax filing and payment deadlines that occurred starting on September 4, 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.

A variety of business tax deadlines are also affected including the October 31 deadline for quarterly payroll and excise tax returns. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2016 extensions run out on September 15, 2017, and calendar-year tax-exempt organizations whose 2016 extensions run out on November 15, 2017. The disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period. Different time periods apply to the various jurisdictions. The time periods for each jurisdiction may be found on the IRS's disaster relief page at 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.

The IRS said it 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.

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 (i.e., the 2017 return normally filed next year), or the return for the prior year (i.e., 2016).

Retirement Plan Rules Relaxed for Hurricane Victims and Their Families

The IRS also announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of 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. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Irma and designated for individual assistance by the Federal Emergency Management Agency (FEMA). A list of eligible counties may be found fema.gov/disasters. To qualify for this relief, 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 will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a victim of Hurricane Irma to take a hardship distribution or borrow up to the specified statutory limits from the victim's retirement plan. It also means that a person who lives outside the disaster area can take out a retirement 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, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in Announcement 2017-13.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax.

For a discussion of extensions for tax deadlines as a result of disasters, see Parker Tax ¶250,125.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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