Saturday, December 17, 2016



Your tax professional may not be an expert in dealing with a disaster income tax loss claim, or a gain that may cost you thousands of dollars in unnecessary tax liabilities!

When casualty / disaster losses strike, CPA’s want to be helpful to their clients. It is a traumatic time for the client. The CPA is a steady minded adviser, seen by the client as an expert in all things “tax.” The truth is that less than .5% of tax returns claim a casualty loss. The average loss claimed is about $20,000. What does this tell you? Most likely, your normal tax preparer has no experience dealing with the intricacies and potential pitfalls of properly reporting a casualty loss. In fact a large loss of over $100,000 probably shows up on less than 1 in 1,000 tax returns. In my first 27 years of practice I had only one client who experienced a casualty loss. In the last 22 years I have helped many clients, annually, throughout the nation who have experienced a major casualty / disaster loss.

Many of the cases that I have been called in to assist have been “fixing” returns prepared by other tax preparers. It would have been better if the taxpayer had sought my help first.

As a taxpayer who is looking for assistance, you may be eligible for a casualty loss claim. You may also find out that you have an unexpected gain.  The gain may not be apparent for a year or two. The unexpected gain may be exempt from any taxation or it may be possible to delay the taxation of the gain for years.

A casualty loss is the tax result of “damage, destruction, or loss of physical property resulting from an identifiable event that that you were powerless to prevent and it occurred suddenly, and was unexpected and unusual.” If insurance compensation is available, the insurance claim must be processed before claiming any loss that may result from a loss in excess of the insurance proceeds.

Taxpayers whose damaged property is located in a region designated as a Federal Disaster Area may be eligible for special tax relief provisions.

Some CPA’s may go too far. One of the worst things a tax preparer can do for a client is “create” a loss deduction that is not supported by the facts. Some of those facts may not be evident as part of a quick cursory analysis.  When a casualty loss is claimed that is not justified, and the IRS audits that loss, the client will be subjected to denial of the deduction, repayment of taxes, interest charges and penalties.

Remember, the amount you save in taxes as a result of claiming a casualty loss will never equal the economic loss that you realized. The best defense, the best strategy is adequate insurance coverage. Unfortunately many insurance companies under-insure their customers, sometimes, in order to sell the policy based on a premium cost expectation of the client. Not all policies are the same, not all premiums are the same.

Any loss that you claim on a tax return will be subjected to legal limitations and the remaining loss will only be a deduction on your return not a “payment” or “credit” from the IRS for the amount of the loss. The greater your pre-loss taxable income is, the greater the “value” of the deduction.

The preparation of tax returns that include a casualty loss must be looked at differently. Most “normal” returns are much like a “scrap book” for the year of your financial life; W-2’s, 1099’s, mortgage interest 1098’s, etc. All of these are static fixed amount forms. They are snapshots for the year’s income and expenses. But, a casualty loss involves a situation that will likely impact your tax return for many years. While the normal tax return may be a “scrap book,” casualty loss reporting is more like “producing” a movie that spans multiple years. Given that situation, it is important, when preparing the return, to “play the movie to the end of the real.” Yes, the subsequent years are projections, but if they are not considered, a new disaster can develop. You can’t just put numbers down on a tax return for the year without considering how the situation is going to “play out over the next several years.” If you don’t understand how things may occur next year or even two years from now, you will likely make bad decisions today. Those bad decisions will likely cost you dearly in the future.

The tax law in this area is very empathetic towards taxpayers. But, if you don’t follow the rules very precisely, you will likely make a costly error.

I offer you a free 30 minute analysis consultation that will determine how you should proceed. Maybe your CPA understands the situation and will get you through the process. Maybe the CPA understands the law, but is not able to properly report the situation on a return. If you need my services maybe I can work with your tax preparer or maybe I need to prepare the whole return for you. All it will cost you, initially, is 30 minutes.


Certified Public Accountant

2975 E. Hillcrest Drive, #403

Thousand Oaks, CA 91362

(805) 497-4411       E-mail

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