Substantiation and Reconstruction of Records –

We all know that in an exam situation the IRS is all about records. In the case of a casualty or disaster the rules are relaxed slightly. The IRS is aware that in most cases when a major casualty occurs there is a good chance that the records you would normally use for substantiation are victim of the casualty. The IRS has several great resources out there to help in this event including Publications 584, 584B, and 2194 as well as a Disaster Assistance Hotline (1-866-562-5227).

Of course, the best records are a listing and pictures or videos of your property kept off site and updated regularly. And some clients, especially those that have been through this or had friends and family go through this before, may even have that type of records. But for the most part people don’t plan ahead like that and we need to be able to help them reconstruct their records.

The first thing to do is file a form 4506 with the name of the federal disaster area, if applicable, on the top of the form. This will get them actual hard copies of the tax forms they filed and not just transcripts. If they are in a federally declared area then the $50 (starting in 2014) fee will be waived as well. If they just want transcripts and Form 4506T can be filed instead.

The victim will, hopefully, have already been provided forms by their insurance companies for listing their damaged or destroyed property. These are invaluable in constructing records for a casualty loss claim. If they have not been provided these forms, there a very good samples in the back of all three of the publications mentioned above.

In this day of paperless records the victim may be able to obtain a wealth of information from his banks, credit card companies, mortgage companies, and public property tax assessors. Others avenues to reconstruct records include real estate agencies for their local market listings, insurance companies for listed property on the policies, contractors who did home improvements, the Goodwill website for current clothing/housewares FMV pricing, and Kelly Blue Book or NADA for vehicles.

The IRS has special teams to handle casualty losses and large scale disasters. They are expecting reconstructed records and have fairly broad latitude in accepting them as long as they are reasonable. For example, if your homeowners insurance policy didn’t indicate you had $200K in jewelry on the dresser in the bedroom, you better have some really good records to back that claim up or it will be denied. The same thing for over-inflating the value of the items in your home. Remember FMV is what a willing buyer, knowing all the circumstances, would have paid a willing buyer immediately before the casualty.

Casualty and thefts can be a huge emotional and financial burden on a taxpayer and their family. Hire a good Enrolled Agent to help curb that burden as much as legally possible.

In accordance with Circular 230 Disclosure