WHY USE A SPECIALIST FOR DISASTER
INCOME TAX REPORTING?
Most tax professionals may never prepare a “Disaster Income
Tax Return.” Seek out a knowledgeable tax professional who has years of
experience providing disaster income tax reporting services!
The catastrophic disaster
event has destroyed or damaged your home! You have many new responsibilities to
accomplish while maintaining a life, a family, a job. One of the
responsibilities is dealing with the income tax consequences including the tax reporting.
The rules can be complicated to understand and comply with. The IRS publication
seems easy, but what is not included. You have no experience dealing with these
rules. These events seem to be occurring more often, yet not only do you have
no experience dealing with the tax aspect, your tax professional also lacks the
experience and deep understanding needed to navigate the requirements. There is
a lot of money at risk. If you don’t get it right, the IRS audit could cost you
a lot of money (additional taxes, interest and penalties) putting your family’s
security at risk. This is money you need to repair/rebuild you home.
You call your insurance
company. You determine that the coverage is not enough . You contact a
contractor, you call you mortgage lender, you arrange to have the debris
removed. Is there asbestos to be dealt with? Then you wonder about the income
tax consequences. In any major casualty, one of the first calls should be to a
tax professional who deals with these event all the time; there are many tax
responsibilities that need immediate attention.
You call the income tax
professional you have relied on for years. The professional tells you he/she
will assist you with the income tax consequences. But did you ask what
experience he/she has reporting these events? What should you do immediately? Probably,
you don’t ask. You have too many other responsibilities and you have dealt with
your tax professional for years. In fact, of all the skilled professionals you
now need, your tax professional is the only one with whom you have an existing
relationship. It seems like this part is under control.
But it is probably not under
In some areas of the country
many, professionals have experience dealing with the tax reporting of a
disaster because annually a tornado or hurricane comes through the area.
But then there is the old “saw:”
“Lighting doesn’t strike twice in the same place.”
Often the tornado is nearby
even if it is not your home that is affected this time. Even in these areas of high
recurrence, a particular tax professional may only deal with a disaster event once
every four or five years.
Some income tax reporting
responsibilities like a disaster are unique or at least rare. Let’s compare
this situation to a situation that you may be more familiar with.
in your many years of owning a car you have changed the oil, replaced
windshield wiper blades or checked the tire pressure. But, when the check
engine light starts flashing you quickly get the car to a mechanic that you trust
will diagnosis the problem. Maybe it is easy or maybe you need a new head
gasket; a difficult situation that you are not going to tackle yourself. The mechanic
has the tools, the skills and the experience to deal with the situation.
you do when the problem is the transmission? Most likely, your trusted mechanic
will tell you that special tools may be needed. There are so many manuals for
different transmissions. The shop isn’t called on to repair a transmission
often enough to make it efficient to have the repair manuals, the tools or the
expertise for transmissions. Your mechanic sends you to a transmission specialist
who has the expertise, the tools and the manuals to assist you with your
What, you ask, does this have
to do with disaster income taxes?
Let’s compare the situations…
For many simple income tax returns,
taxpayers prepare their own income tax forms, like changing the oil or they may
have a professional do the work. Once the tax return becomes more complicated
and seems beyond simple preparation knowledge, taxpayers develop ongoing
relationships with a tax professional who demonstrates they have the knowledge
to prepare the taxpayer’s returns. These situations usually involve ongoing tax
reporting of investments, rentals, farming operations, large charitable
contributions, small businesses, employee expenses, deferred compensation, and
more. The tax professional will often be involved in tax planning to help the
taxpayer deal with their tax responsibilities very efficiently. But when you have
a disaster recovery situation, what are the odds that your tax professional
will have the specialized knowledge to assist you with the proper reporting,
including using the benefits built into the tax law provides for these events?
2014 Pew Trust study states:
told, up to 1.2 million tax preparers make a living deciphering the labyrinth
U.S. tax code for taxpayers. The IRS reported 63 percent of all returns were
done by tax preparers in 2013 and estimates are that about half were filed by
The study determined that “many of the small, independent tax preparers are subject to
no standards at all.” For these income
tax preparers there are no standards of professional competence they must
In 2011 approximately 141,000
tax returns were filed claiming a casualty loss. The average loss claimed was
$22,000. This average was about the same for 2005, the year of the Hurricane
Katrina disaster. The number of forms claiming a casualty loss deduction for
2005 was about 819,000. Assuming that 2011 was a normal year and that the
number of income tax preparers for 2011 was similar to 2013, 1.2 million, there
is about a 10% chance that a tax preparer will have a casualty loss claim in
any one year to report. To this situation add the fact that the average
casualty loss for 2011 was $22,000. Many of the losses claimed were quite
small. Where a disaster loss is involved the deductible loss is likely to be
substantially greater than $22, 000. The average includes small casualty losses
under $22,000, as well as some losses of
over $100,000 or $500,000. There is a very small chance that an individual
income tax preparer will see a casualty loss claim in any one year or even in a
life-time. It is also probable that in any one year there are going to be
income tax preparers who have more than one client who has a casualty loss
claim as disasters result in a cluster of losses. You can conclude that in many
areas of the country it is likely that an individual income tax preparer may
spend a career not having to prepare a tax return that includes a significant
disaster loss claim. I can testify that for the first 9 years of my
professional career, I had no experience with a casualty loss of any kind. In
my first 27 years of practice only one client had a significant casualty loss.
IRS Statistics for 2005 and 2011
With Itemized Deductions )
Casualty or Theft Loss Deductions
Total Number of Returns Filed
After the 1994 Northridge
Earthquake that rocked the San Fernando Valley area of Los Angeles in January,
damaging several hundred thousand homes, I had the opportunity to spend months prior
to the 1994 filing season that started in in January 1995, preparing for the
tax returns that would be reporting the income tax consequences of the
disaster. Once I had developed that specific knowledge to sereve taxpayer after
the 1994 earthquake, I decided that it was an area of the tax law that I could
concentrate on, helping taxpayers in other disasters.
Over the years I have had the
opportunity to correct returns filed by other tax preparers, often saving the
taxpayers tens of thousands of dollars in taxes.
Like the “transmission
specialist,” whose business is often dependent on referrals from auto
mechanics, knowledgeable income tax professionals call on my firm to assist
their clients with the details of reporting a disaster while retaining the
preparation of the rest of the tax return themselves, maintaining the
ongoing relationship with their client.
This way the client has the best of service, the basic return is prepared by a
tax preparer who has the ongoing service relationship while the disaster
reporting is handled by our firm in an efficient manner consistent with observing
the special tax laws related to reporting a disaster event.
These tax professionals don’t
want to learn all the details necessary to properly report a client’s disaster reporting
situation. The client gets the benefit of having an experienced professional
make sure that the income tax consequences of the disaster are reported
properly. The income tax professional saves learning time for reporting an
event that they may never have to deal with ever again.
Questions to ask your
income tax professional
Have you prepared
any income tax returns reporting a disaster?
have prepared disaster loss returns for taxpayers in California (fires and
earthquake), East Coast (hurricanes), Mid-west (fires and floods).
How much time do
you spend, annually, maintaining the special knowledge related to reporting a
disaster on an income tax return?
I have spent over 22 years concentrating on this area of the tax law, I spend
over 100 hours per year maintaining and updating my knowledge. The IRS and
courts are always issuining out new interpretations or sustaining and solidifying
What services do
you provide to the community related to preparing for a disaster?
have prepared a concise Disaster Preparation Guide for taxpayers, if
implemented, will reduce the stress of experiencing a disaster event.
have materials that are continually revised for presentation to taxpayer
community groups consisting of those who have experienced a disaster. I don’t
charge for my time for these meetings.
is a lot of information on this blog that I have developed over the past eight
can view a video of a presentation I made in Colorado in February 2014. It can
be viewed by Googling or searching YouTube for “Post Disaster Income Issues.”
personally experienced a disaster loss?
life was totally changed as a result of the January 17, 1994, Northridge
What types of
losses have you reported for taxpayers?
Fires, Floods, Hurricanes
Is your tax
preparer willing to work with a knowledgeable CPPA to be confident that your
disaster situation is being reported properly?
Your Tax Preparer’s Answer: