Surviving natural disasters
How CPAs can help.
April 16, 2012
Who knew the evacuation order issued on Aug. 29, 2005 would be the last time I would see New Orleans as I knew it? A “hurricane trip,” as I referred to it, happened frequently, almost yearly, so why would this time be different? But, as my family and I patiently waited for gas in the mile-long lines, I knew this would be a long trip. After waiting out the storm at my sister’s tiny apartment, I realized I would not be going home anytime soon. As the days grew longer and reality set in, there were financial challenges many displaced residents were now forced to face.
Could these financial challenges have been avoided had each individual prepared for it?Being a Hurricane Katrina survivor, I know firsthand about undergoing these financial difficulties — both as a survivor and a CPA serving clients. After losing my home, personal belongings, and all that I owned, I too had many questions about the necessary steps to take to recover financially after Katrina.
Tapping into available financial resourcesYour clients will look to you as a CPA to help navigate through these financial uncertainties. You should first assist them through available financial resources. Help your client file for federal assistance with Federal Emergency Management Agency (FEMA) or submit loan requests with the Small Business Administration (SBA). These agencies usually require copies of previous years’ tax returns and/or financial statements to determine whether the client is eligible for assistance. Helping them access the available resources may be essential in their road to recovery.
Filing a casualty loss on the taxpayer’s tax return is another way to provide financial resources to your client. According to the IRC Section 165, an individual is entitled to deduct a casualty loss for losses that have/will not be covered by insurance, federal funds or other reimbursements. If the disaster has been deemed a federally declared disaster, your client has the option of electing to deduct the loss in the previous year or claiming the loss during the current year. In the event your client decides to amend the prior tax year, write in red the name of the disaster across the front of the tax return to expedite the processing of the tax refund.
Substantiating the lossesI can distinctively recall attempting to compile a listing of all items destroyed after Hurricane Katrina. Typically your clients will not have any records, documents, or other evidence to substantiate the loss on the tax return or claims for insurance purposes. In such an event, help your client envision room by room, making a mental note of items destroyed. Also, suggest that they obtain documents that can substantiate the cost of each item. For example, retrieving credit card statements, bank records, loan documents, and other records may serve as supporting corroboration for losses taken on the return. The IRS Publication 2194 may be helpful in this process.
Preparing your clients nowThe reality is any of your clients may experience a natural disaster during their lifetime. As a result, it is important for your clients to be prepared. Begin by creating a checklist of financial documents that are essential during the aftermath of a disaster or irreplaceable. These items should be saved to a portable hard drive or server and accessible anytime, anywhere. Items such as medical records, birth certificates, title, deeds, insurance policies, bank and investment information or any other document that can provide an individual the ability to verify identity or substantiate a loss are essential in carrying on with life.
Also have a discussion about property insurance that can be key to the restoration of your clients’ financial life subsequent to a storm. Determine whether your client has the appropriate insurance policies for risks that may affect their area. While many Hurricane Katrina victims had homeowner’s insurance, some did not maintain a flood insurance policy. Since homeowner’s insurance policies do not cover against flooding, they were left underinsured.
Take advantage of this time of the year, if you are preparing clients’ tax returns, to question whether they have put a disaster financial plan in place. Having these conversations regarding disaster financial planning will not only add value to your services but ensure your clients are protected in case a disaster strikes.
Kemberley Washington, CPA, is an accounting instructor in the School of Business at Dillard University and has previously worked for the IRS as both an agent and investigator. Check her blog out at Kemberley.com.