IRS has Provided Significant Relief for Taxpayers Affected by Hurricane Harvey

As a result of the devastation caused by Hurricane Harvey, IRS has granted two significant forms of relief for those affected by the storm. The Service is granting an automatic extension of time to file and pay taxes due before January 31, 2018. Additionally, the rules permitting loans and hardship distributions have been relaxed so that affected persons can obtain funds to cover costs created by the storm.

IRS Grants Extension of Time

Automatic relief is given to any individual with an address of record inside the disaster areas designated by FEMA as qualifying for assistance. Currently, the designated areas are Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria and Wharton Counties. Additional counties are expected to be added and are reported at https://www.fema.gov/disasters.

Relief is also provided to: a) those living outside of a disaster area but whose records are located within a disaster area and b) relief workers involved with a recognized organization. However, these persons must contact the IRS at (866) 562-5227 to discuss the extent of relief that will be granted.

Filing and payment deadlines are deferred starting on August 23, 2017. Affected individuals are given until January 31, 2018, to file returns and pay any taxes that would be due between these dates. This includes estimated taxes due on September 15, 2017, and January 16, 2018.

While 2016 individual income tax returns previously extended to October 16, 2017, can now be filed by January 16, 2018, relief does not apply to the payment of the income taxes due for these returns. The Service reasons that since these income taxes were payable April 18, 2017, the original due date for these returns, any balance due should not be eligible for relief.

Business deadlines are also affected, including the October 31 deadline for payroll and excise tax returns.

IRS states that it will waive late-deposit penalties for federal payroll and excise tax deposits normally due between August 23 and before September 7, if the deposits are made by September 7, 2017.

IRS Eases the Rules for Qualified Plan Loans and Hardship Distributions

IRS is providing relief so that qualified employer retirement plans can more easily make loans or hardship distributions for needs arising from Hurricane Harvey to an employee or former employee a) whose principal residence on August 23, 2017, was located in one of the Texas counties identified by FEMA; b) whose place of employment was located in one of these counties on that date; or c) whose lineal ascendant or descendant, dependent or spouse had a principal residence or place of employment in one of these counties.

The IRS announcement notes that for additional areas subsequently identified by FEMA, the date that the relief begins is changed from August 23, 2017, to the date an area is added to the list.

A qualified plan can normally make a hardship distribution where the participant meets one of several listed hardships. Additionally, a participant receiving a hardship distribution is barred from contributing to the plan for at least six months. Under the current IRS announcement, alleviation of a need created by Hurricane Harvey will qualify for a hardship distribution (though not one of the listed hardships contained in regulations). Furthermore, the six-month rule will not apply. This rule can help a person who takes a distribution to assist a relative living in an affected area but who wants to continue contributing to the qualified plan.

Representations made by the participant can be relied on by a plan administrator concerning the need for and required amount of a Hurricane Harvey-related hardship, unless there is actual knowledge to the contrary. Distributions under this relaxed rule must be made on or after August 23, 2017, but no later than January 31, 2018.

While qualified plans do not need to provide for plan loans or hardship distributions, those which do generally must contain express language permitting these options. For those affected by the special IRS hardship distribution and loan rules, the plan document will not be required to include this language. This will permit participants immediate access to these funds. However, the plan will need to be amended by the end of the first plan year beginning after December 31, 2017, to include such provisions.

The announcement also provides for some liberalization of documentation requirements otherwise imposed on a qualified plan.

If you have any questions on these matters, do not hesitate to contact your Marcum tax professional.