By Kelly Hanley, Esq., Chicago Tax Attorney
As a seasoned Chicago Tax Attorney, I understand the complexities that arise when trying to comply with the morass of tax laws, especially in the aftermath of natural disasters like the severe storms and flooding that impacted Chicago last fall. With the approaching deadline for 2022 tax returns on extension based on the special tax relief measures in place, Chicago taxpayers, both individuals and businesses, need to be fully informed and prepared. I wrote this blog post to help those in Chicagoland understand these important tax issues.
Deadline Reminder for 2022 Tax Returns on Extension
The IRS has issued a reminder specifically for disaster-area taxpayers who received extensions to file their 2022 returns. The deadline for these returns is now set for February 15, 2024. This extension applies to taxpayers affected by various disasters last autumn, including those in Cook County, Illinois, who were impacted by the storms and flooding.
The IRS typically provides relief, including postponing tax filing and payment deadlines, for areas designated by the Federal Emergency Management Agency (FEMA). Taxpayers with their address of record in a disaster-area locality automatically receive extra time without needing to request it. This relief is part of a coordinated federal response to disaster damage based on FEMA’s assessments.
Specific Tax Relief for Severe Storms and Flooding in Cook County, Illinois
Following a FEMA disaster declaration, individuals and businesses affected by the severe storms and flooding in Cook County are eligible for specific tax relief. This relief includes extended deadlines for filing various individual and business tax returns and making tax payments.
Key Provisions of the Tax Relief
Individuals with a valid extension to file their 2022 return, which originally expired on October 16, 2023, now have until February 15, 2024. However, tax payments related to these 2022 returns, due on April 18, 2023, are not eligible for this extension. A simpler way to put this is that this extension is for filing, not for payment. That said, the deadline for quarterly estimated income tax payments, which was originally due on January 16, 2024, is now also extended to February 15, 2024.
Deadlines for quarterly payroll and excise tax returns originally due on October 31, 2023, and January 31, 2024, are extended. Likewise, for corporations and tax-exempt organizations with extensions expiring in late 2023, the new deadline is February 15, 2024.
Penalties on payroll and excise tax deposits due after September 17, 2023, will be abated if the deposits were made by October 2, 2023. (I go into this in more detail, below).
Relief for Taxpayers Outside the Disaster Area
Taxpayers living outside the Chicago area, but whose records necessary for meeting deadlines are located within the affected area, are also eligible for relief. They should contact the IRS directly at 866-562-5227. This includes relief workers and those affected indirectly by the disaster.
Time-Sensitive Actions on Like-Kind Exchanges
Affected taxpayers also have until February 15, 2024, to perform various other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2018-58. This includes certain actions related to like-kind exchanges of property, as detailed in section 17 of Rev. Proc. 2018-58.
A like-kind exchange, also known as a 1031 exchange, allows for the deferral of capital gains taxes when a property is exchanged for another of like kind. In a typical like-kind exchange, the taxpayer has a set period to identify the replacement property and then complete the exchange. For those in disaster-affected areas, these periods may be extended, offering more time to navigate these transactions amidst the aftermath of a disaster.
The extended deadlines offer much-needed flexibility, allowing taxpayers to reassess their financial and property holdings without the immediate pressure of tax implications. This is particularly important given the potential impact of the disaster on property values and market conditions in Chicago and Cook County.
With more time to complete like-kind exchanges, taxpayers may find opportunities to reinvest in disaster-affected areas, potentially aiding in the recovery and revitalization of their communities.
While these extensions and relief measures offer substantial support, you need to approach these transactions with a thorough understanding and caution. Each taxpayer’s situation can vary, and the specifics of the tax law can be complex.
Given the complexities of like-kind exchanges and the nuances of disaster-related tax relief, consulting with a tax professional, such as a Chicago Tax Attorney, becomes even more crucial. A qualified attorney can provide personalized advice, ensuring that taxpayers in Cook County not only comply with the extended deadlines but also make informed decisions that align with their long-term financial and investment strategies.
Exclusions and Limitations
While the IRS has offered extensions for various tax filings and payments for affected taxpayers in Cook County, including Chicago, this relief does not extend to all types of tax-related obligations. Specifically, the postponement does not apply to information returns, which include forms in the W-2, 1094, 1095, 1097, 1098, and 1099 series.
Let’s break down what this means for you as a taxpayer:
These forms are used to report various types of income, other than wages, salaries, and tips (which are reported on W-2 forms). For example, 1099 forms are used to report income from self-employment, interest, dividends, government payments, and more.
The requirement to file these forms by their original deadlines remains in place. This means businesses and other entities must remain diligent in issuing these forms to their recipients by the prescribed dates to avoid penalties for late submissions.
These forms are required for taxpayers as they contain information necessary to complete their own tax returns accurately. Delays in receiving these forms can lead to complications and potential errors in tax return preparation.
Penalties Abatements on Deposits
As previously mentioned, penalties on deposits due after September 17, 2023, will be abated, provided the tax deposits were made by October 2, 2023. This provision primarily concerns payroll and excise taxes:
Businesses are generally required to make regular deposits for payroll taxes withheld from employees’ wages. Failure to deposit these taxes on time typically results in significant penalties.
The IRS’s decision to abate penalties for these deposits during the specified period is a significant relief for businesses impacted by the disaster. It provides additional time to manage cash flows and organize financial records disrupted by the severe storms and flooding.
To benefit from this penalty relief, affected taxpayers must ensure that they make the required deposits by the extended deadline of October 2, 2023. I highly recommend proactive management of your tax obligations during this period.
Casualty Losses and Other Relief Measures
Casualty losses due to federally declared disasters present a unique tax opportunity for affected taxpayers. These losses can be claimed on federal income tax returns, but there are specific considerations and steps involved.
A casualty loss is a loss from the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. In this context, it specifically refers to losses incurred due to the severe storms and flooding in the affected areas.
Taxpayers have the option to claim these losses on their federal income tax return for either the year in which the disaster occurred (2023) or the prior year (2022). This choice can provide significant tax advantages, depending on your tax situation in either year.
The deadline to make this election is October 15, 2024 (next fall). This extended deadline allows you ample time to assess your losses, gather necessary documentation, and make an informed decision on which tax year would be more beneficial for claiming these losses.
To claim a casualty loss, you must be able to substantiate the amount of loss, which typically involves documenting the value of the property before and after the disaster, as well as any insurance reimbursements.
Claiming a casualty loss can result in a lower taxable income, potentially leading to a significant tax refund, which can provide financial relief to those who have suffered property damage.
In addition to the provisions for casualty losses, the IRS offers other forms of relief to ease the burden on disaster-affected taxpayers:
- Waiver of Fees for Copies of Tax Returns: Recognizing the challenges faced by taxpayers in recovering from a disaster, the IRS will waive the usual fees for requests for copies of previously filed tax returns. You might need access to these documents for reconstructing records, supporting insurance claims, and preparing amended or current year tax returns.
- Procedure for Requesting Waived Fees: When requesting copies of tax returns or transcripts, you should clearly mark the assigned FEMA declaration number (4749-DR) in bold letters at the top of Form 4506 (Request for Copy of Tax Return) or Form 4506-T (Request for Transcript of Tax Return).
- Importance of These Documents: Having access to previous tax returns can help in accurately reconstructing income and asset values for various purposes, including tax filings and insurance claims.
Special Considerations for Retirement Plans and IRAs
Special Disaster Distributions
Special disaster distributions refer to certain distributions from retirement plans and IRAs that are made to individuals affected by federally declared disasters. These distributions often come with specific tax relief benefits.
Typically, early distributions from retirement accounts are subject to a 10% early withdrawal penalty if the account holder is under the age of 59½. However, for special disaster distributions, this penalty is often waived. Additionally, the income tax on these distributions can be spread over a three-year period, making the tax impact more manageable.
In some cases, individuals may have the option to repay the disaster distribution back into their retirement account over a set period, which can help in restoring their retirement savings while potentially reclaiming any taxes paid on the original distribution.
Eligibility for special disaster distributions typically depends on the individual’s residence in the disaster area and whether they have suffered financial losses due to the disaster. The specific criteria can vary based on the nature and extent of the disaster.
Hardship withdrawals are emergency withdrawals from retirement accounts that are allowed under certain dire financial situations, which now include relief for those in disaster-affected areas.
In response to a disaster, the rules for hardship withdrawals can be relaxed. This may include waiving certain documentation requirements, expanding the reasons for which a hardship withdrawal can be taken, or increasing the maximum amount that can be withdrawn.
While hardship withdrawals can provide immediate financial relief, you still need to consider the tax implications. These withdrawals are typically included in taxable income and may not be subject to the favorable tax treatment that applies to special disaster distributions.
Some retirement plans may offer loan provisions to disaster-affected individuals. These loans can provide another source of funds without the immediate tax implications of a distribution.
Employers may need to amend their retirement plan documents to provide these relief options. Participants should check with their plan administrators about the availability of these options.
Keeping detailed records of any distributions or loans taken, and the reasons for them, is important for future tax filings and for potential repayment plans. Remember that decisions regarding retirement funds are significant and can have long-term financial implications. Affected taxpayers should consider consulting with a financial advisor or a Chicago Tax Attorney to understand the best course of action in their specific situation.
Collection and Examination Matters
Handling IRS Collections in Disaster Situations
If you’re in a disaster-affected area and are contacted by the IRS for collections, you need to communicate your disaster-affected status right away. The IRS often has procedures in place to provide relief or accommodations in these situations.
You may request a temporary deferral of the collection process if you are experiencing severe hardship due to the disaster. This can provide much-needed relief and time to recover financially.
When communicating with the IRS, it’s helpful to provide documentation or a detailed explanation of how the disaster has impacted your ability to pay. This might include insurance claims, repair costs, or proof of displacement.
Examination and Audit Considerations
If you are under audit or examination and have been impacted by the disaster, you may request an extension of deadlines for providing information or responding to IRS inquiries.
In some cases, if you have been displaced, you can request a change of venue for meetings or proceedings related to the examination.
The IRS has discretion in handling examinations and audits for disaster-affected taxpayers. This might include postponing certain actions or being more lenient in terms of information requests.
The IRS understands that records may have been lost or damaged in the disaster. You should communicate any difficulties in reconstructing records and take advantage of available IRS guidance and relief for reconstructing documentation.
Engaging a tax professional, such as a Chicago Tax Attorney, can be particularly beneficial in these circumstances. A professional can help navigate the collection and examination process, communicate effectively with the IRS, and ensure that your rights and interests are protected.
Staying Informed and Prepared
As tax deadlines approach and relief measures are applied, you need to stay informed and be prepared. You can download forms and publications from the IRS website and seek professional advice if needed.
For personalized guidance, taxpayers in Chicago and the surrounding areas should consider consulting with a Chicago Tax Attorney. Professional assistance can provide clarity and ensure all relevant tax laws and relief measures are effectively used, especially in the challenging aftermath of a natural disaster.
This blog post was designed to provide taxpayers in Chicago and Cook County with the essential information needed to navigate these tax-related challenges. Remember, the key to successfully handling tax matters, particularly in the wake of a disaster, lies in being well-informed and seeking professional advice when necessary. As your Chicago Tax Attorney, I am here to assist you in steering through these complexities and ensuring your tax responsibilities are managed efficiently and effectively.