IRS disaster relief: What tax professionals need to know

If a disaster, such as a flood, fire, earthquake, tornado, or hurricane meets specific criteria, the Federal Emergency Management Agency (FEMA) will declare it a federal disaster. When this is the case, the IRS provides tax relief to ease the burden for affected taxpayers. Tax professionals can navigate this landscape for their clients and provide assistance at a time when it is greatly needed. We’re providing insight into IRS disaster qualifications, relief available, ways to claim it, disaster planning, and assistance after a disaster. 

Understanding IRS disaster relief 

What qualifies as a disaster? In order for a disaster to qualify for IRS tax relief, the area must be declared a major disaster by the Federal Emergency Management Agency (FEMA). The FEMA website contains information about disaster preparedness, lists of federal disasters, assistance available, and tools to recover. 

Determining if an area qualifies for IRS tax relief 

The FEMA-declared disasters are accessible by checking the list of Current Disasters or by using the Disaster Search Tool, filtering for “major disaster declaration.” Additionally, IRS news releases announce disaster areas and the accompanying relief. They may be found at the IRS website page related to tax relief in disaster situations¹. 

Example: IR-2024-253, Oct. 1, 2024 

“The Internal Revenue Service today announced disaster tax relief for all individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. 

Taxpayers in these areas now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments. Among other things, this includes 2024 individual and business returns normally due during March and April 2025, 2023 individual and corporate returns with valid extensions and quarterly estimated tax payments…” 

Which taxpayers are eligible for IRS disaster relief? 

Taxpayers affected by a federally declared disaster are eligible for relief, including: 

• An individual 
• Any business entity or sole proprietor 
• A partner in a partnership 
• A shareholder in an S Corporation 

By default, individuals and businesses in a federally declared disaster area are eligible for IRS disaster relief, but they do not have to be located there to be an “affected taxpayer.” Examples of affected taxpayers who do not reside in a federally declared disaster area include: 

• Taxpayers whose records are necessary to meet a filing or payment deadline are located in a covered disaster area
• Clients of tax preparers who are unable to file returns or make payments on behalf of the clients because of a federally declared disaster
• All individuals and disaster relief workers who were visiting the area during the disaster and were injured or killed due to the disaster
• Partners or S Corporation shareholders who do not have the necessary records (i.e., Schedules K-1) to file their returns, due to the partnership or S Corporation being affected by a disaster. Their filing and payment deadlines are postponed until the end of the postponement period just like the affected partnership or S Corporation. 
   

IRS disaster relief measures available 

Filing and payment deadline extensions 

If an affected taxpayer lives (or the business is located) at an address in an area that qualifies for IRS disaster tax relief, they are automatically granted extra time to file federal tax returns and pay taxes. 

Affected taxpayers who do not reside in the federal disaster must call the IRS Disaster Hotline at 866-562-5227 to obtain the postponement for filing and payment. The taxpayer must explain why they are affected and provide the FEMA disaster number of the area, which may be obtained from the FEMA website. The IRS keeps record of the disaster relief postponement in the taxpayer’s account. 

Extensions apply to all types of tax returns and payments, including annual income tax returns, informational returns, quarterly estimated income tax payments, and quarterly payroll and excise tax returns and deposits.

Example: Client of a tax preparer located in a disaster area 

Bob does not live in a federally declared disaster area, but he is a client of a tax preparer located in one. Due to the disaster, the tax preparer is unable to file Bob’s tax return. Bob may call the IRS Disaster Hotline and request a postponement for filing and payment by explaining the situation and providing the FEMA disaster number he obtained by utilizing the FEMA Disaster Search Tool. His new deadline will be the date published by the IRS for that disaster. Bob may indicate the name of the disaster on the front page of his tax return, but it is not required.

Penalty abatement 

Disaster penalty relief announced by the IRS is automatic. Affected taxpayers aren’t required to take any action to receive penalty abatement. Eligible taxpayers who have already fully paid the penalties will receive a refund or a credit of the payment toward another outstanding tax liability. 

Example: HI-2024-07, Dec. 12, 2024 

“The Internal Revenue Service today announced new penalty relief for Maui wildfire victims impacted by the historic 2023 wildfires, which caused a reported $5.5 billion in damages, including the destruction of regional United States Postal Service buildings. 

The IRS will be providing failure to pay penalty relief to nearly 600 Maui taxpayers… 

Due to the widespread damage and closure of postal facilities, the IRS did not mail the initial notice, typically the CP14 notice, to taxpayers who filed a balance due return in Maui and Hawaii counties, between Aug. 17, 2023, and Jan. 30, 2024. As a result, the IRS is removing any failure to pay penalties added to balance due tax periods from the date the IRS would have normally mailed the notice until the date the penalties were fully paid or through Dec. 30, 2024, whichever is earlier.” 

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Casualty loss deductions 

For tax years 2018 through 2025, only losses attributable to a federally declared disaster are deductible for individuals. Uninsured or unreimbursed disaster-related losses are reported on Form 4684. The FEMA declaration number must be listed on the form. These qualified disaster-related personal casualty losses are: 

• Not subject to an AGI limitation 
• Deductible to the extent they exceed $500 per casualty 
• Allowed as a deduction in addition to the standard deduction 
• Allowed against alternative minimum taxable income 

The casualty loss deduction may be claimed on either the return for the year the loss occurred, or the return for the prior year. The election to deduct the loss in the preceding year may be made up to six months after the regular due date for filing the original return (without extensions) for the disaster year. 

Note: Casualty losses reimbursed by disaster relief payments are not deductible for income tax purposes.

Qualified disaster relief payments from a government agency 

Qualified disaster relief payments are generally excluded from gross income. Affected taxpayers may exclude from their gross income amounts received from a government agency (such as FEMA) for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. 

The ‘‘Federal Disaster Tax Relief Act of 2023’’, enacted on December 12, 2024, provides guidelines for two types of disasters: 

• Qualified wildfire relief payments are specifically excluded from gross income. The payments must be received during taxable years beginning after December 31, 2019, and before January 1, 2026. 
• East Palestine train derailment payments are treated as qualified disaster relief payments. The train derailment occurred in East Palestine, Ohio, on February 3, 2023. The amount may be provided by (1) a Federal, State, or local government agency, (2) Norfolk Southern Railway, or (3) any subsidiary, insurer, or agent of Norfolk Southern Railway or any related person. 

Note: Qualified disaster relief payments (and qualified wildfire relief payments) are taxable if the reimbursed expenses are also paid by insurance or other reimbursement. They are also taxable if the taxpayer is identified by the Attorney General to have been a participant or conspirator in a terroristic action. 

Additionally, no increase in the basis or adjusted basis of any property is allowed from any amount excluded from income with respect to such property. 

IRS disaster relief related to retirement plans and IRAs 

SECURE 2.0 Act of 2022 provides permanent rules for using retirement funds in the case of major disasters occurring on or after January 26, 2021. Prior to that, Congress would enact relief on a disaster-by-disaster or year-by-year basis. 

The disaster relief is available for qualified individuals. Taxpayers are qualified individuals if: 

• Their principal residence is within the qualified disaster area during the incident period and 
• They sustained economic loss as a result of the disaster 

Disaster relief includes: 

• Special treatment for first-time homebuyer distributions or hardship withdrawals if they were to be used to purchase or construct a personal residence in a disaster area, but could not be used for that purpose due to the disaster 
• Up to a $100,000 (subject to limitations) loan from an eligible employer plan (not an IRA) 
  • Up to an additional year to repay the loan 
• Up to $22,000 in qualified disaster recovery distributions from employer retirement plans or IRAs within 180 days of the disaster 
  • Not subject to 10% additional tax on early distributions 
  • May be included in income ratably over three years 
  • If the full amount of the distribution is repaid to the plan within three years, it may be excluded from income 

Note: Not all retirement plans or IRAs allow for these provisions. An employer or IRA custodian is permitted to choose whether to amend its plan to satisfy the provisions of SECURE 2.0. 

Example: Qualified disaster recovery distribution 

Sara receives a $18,000 qualified disaster recovery distribution from her IRA in 2024 and chooses to include the distribution in income over a three-year period at $6,000 for each year (2024, 2025, and 2026). 

In 2026, Sara chooses to recontribute the full $18,000 into her IRA. Sara may file amended federal income tax returns for 2024 and 2025 to claim a refund of the tax attributable to the $6,000 which was included income for each of those years, and she will not be required to include any income in 2026 with respect to the 2024 distribution. 

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How to claim IRS disaster relief for your clients

Tax professionals’ role in disaster planning and IRS disaster relief

Helping clients prepare before a disaster 

Tax professionals can help their clients be prepared for disasters by recommending the following: 

• Keep contact details for your tax professional easily accessible 
• Store personal and business accounting records (computer files) in a secure location and keep a backup in another location 
• Make digital backups of important documents, such as birth certificates, passports, social Security cards, drivers licenses, bank statements, investment accounts, W-2s, tax returns, insurance policies, and supporting paperwork 
• Store digital copies of your documents in a separate location 
• Make physical copies of your important documents and store them in a fireproof safe or water-tight container in your home 
• Store original documents in a safe deposit box at a bank or a secure storage facility away from your home 
• Keep a detailed inventory of your assets with photos for insurance purposes 

Tax professionals should keep their client contact information updated. Helpful information includes multiple phone numbers, email addresses, primary residence address, business address (for business owners), other address(es), and emergency contacts in the area and outside the area. 

Periodically communicating IRS disaster relief to clients can help them stay informed, even if it doesn’t currently affect them. They will then be educated about disaster relief in general, which may alleviate concerns in a future disaster which affects them and may affect their ability to communicate with their tax professional. 

Assistance after a disaster 

Tax professionals can communicate IRS disaster relief to their clients in the wake of a disaster. Simply knowing that filing due dates and payments have been extended can reduce stress. Clients will also appreciate the guidance to check with their retirement plan administrator or IRA custodian about penalty-free distributions or loans. 

Following notification, tax professionals can provide copies of the documentation they have stored for their clients. They can also rebuild lost records with a tax return transcript and a copy of the tax return from the IRS. These may be requested online or by filing Form 4506, Request for Copy of Tax Return and Form 4506-T, Request for Transcript of Tax Return. The IRS waives the fees and expedites these requests for people who need to apply for disaster-related benefits or file amended returns to claim disaster-related losses. 

To speed up the process when filing Forms 4506 or 4506-T, the following should be written on the form(s): 

• The request is disaster related, and 
• The type of disaster and the state where it occurred 

Tax professionals in disaster areas with clients located outside the disaster area can choose to use the Bulk Requests from Practitioners for Disaster Relief option², described on the IRS website. 

Offering additional support in the aftermath of a disaster 

Tax professionals can assist their clients by tracking extended due dates and payments, ensuring compliance when the due date arrives. If a client relocates after a disaster, the tax professional can file Form 8822, Change of Address. 

Clients may also need assistance with collecting and organizing documentation for insurance claims, government aid, and casualty losses. When the time comes to file their tax return, they will definitely need guidance and explanation of the IRS rules regarding losses, payments, and retirement plan distributions or loans. A tax professional may also amend prior year returns for casualty losses or after retirement distributions are repaid to the plan. 

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