October 2017 JD Supra
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IRS is authorized to grant certain relief that may help Taxpayers and Businesses recover financially from the impact of a disaster when the federal government declares their location to be a major disaster area.  IRS could grant additional time to file returns and pay taxes. Both individuals and businesses may take advantage of available tax benefits arising from a federally declared disaster area.

IRS defines a Casualty as:

  1. The damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
  2. A sudden event is one that is swift, not gradual or progressive.
  3. An unexpected event is one that is ordinarily unanticipated and unintended.
  4. An unusual event is one that isn’t a day-to-day occurrence and that isn’t typical of the activity in which you were engaged.

Taxpayers ought to safeguard their tax and financial in case of a potential disaster.   Records are critical for tax purposes, insurance reimbursement, applying for aid from the Federal Emergency Management Agency (FEMA) and the Small Business Administration (SBA).  Paperless recordkeeping and Cloud storage are optimal methods for preserving financial and tax records.

When disasters impact Individuals and Businesses that are not prepared with recordkeeping and records that have to be reconstructed.  IRS provides guidance for Record Reconstruction as follows:

  1. Record Reconstruction – Vehicle:    It is important to determine a vehicle’s cost on the date it was purchased and determine its fair market value on the date it was destroyed. 
  2. Record Reconstruction – Business
  • Inventory:  Obtain copies of invoices (dating back at least one year) from suppliers. 
  • Income: Obtain copies of bank statements. The deposits should closely reflect sales for any given period.
  • Payroll records: If the business uses a service, get copies of records. If not, request copies of back forms from federal and state agencies. To reconstruct a current quarter, get copies of checks from the bank. Also ask employees for copies of their pay stubs.
  • Last year’s tax returns: Including sales tax reports, business licenses (which normally reflect gross sales for a given period), and payroll returns.  The previous income tax returns may have a depreciation list to reconstruct business assets.
  • Furniture and fixtures: Sketch the inside and outside of the business location. Then start to fill in the details of the sketches.
  • Inside: Where was the equipment located? What fixtures and furniture were in the store or office? Where was the inventory located?
  • Outside: Shrubs, landscaping, parking, signs, awnings?
  • If an existing business was purchased – go back to the broker for a copy of the purchase agreement. Check with the previous owner for a copy.
  • If a building was constructed for the business – go back to the contractor for building plans.
  1. Record Reconstruction – Real Property
  • Take photographs of real property as quickly as possible after the casualty to establish the amount of damage.
  • The best evidence is the escrow papers. Begin by calling the title company and the bank that handled the transaction.
  • If the necessary records are destroyed, use “comps” for the neighborhood. A licensed appraiser can establish the value with comps. Comps are comparable sales in the same neighborhood. 
  • Search Multiple Listing real estate web sites in order to establish basis or fair market value.
  • Insurance policies list the value of the building to establish a base figure for replacement value insurance. Check with the agent to find out what other records are on file with the policy.
  • Improvements may be proven by calling the contractors involved and asking for old records. You might also ask for statements from the contractors verifying their work and cost.
  • Get written statements from friends and family who saw the home before and after any renovations. Ask if they have any photos of the house taken at family gatherings.
  • If a home improvement loan was taken out, get the paperwork from the bank that issued it.  The amount of the loan may help establish the cost of the improvements.
  • If no other records are available, check at the county assessor’s office for old records about the property.
  • Check court records for probate of inherited property. If a trust or estate existed, contact the attorney who handled it.
  1. Record Reconstruction – Personal Property

This is a very difficult area to reconstruct due to the number of items that may have existed.  Taxpayers ought to look at on line retailers and try to come up with a list of comparable personal items.

Don’t be a victim of your own making.  If your records have been destroyed or lost due to a disaster, consult a Forensic Account that is expert in reconstructing records.