News & Insights

In recent weeks, many individual taxpayers and business owners in California have received an ominous looking “notice and demand” letter from the Internal Revenue Service (IRS). Any kind of correspondence from the IRS can provoke anxiety, so many Californians are understandably apprehensive and confused about how to respond to this letter. At this point, the best strategy may be to simply ignore it.

Tax relief for disasters

Due to rampant rains that triggered floods and landslides in late 2022 and early 2023, in January of this year the IRS granted disaster relief to storm victims throughout California — resulting in extended due dates for both tax returns as well as extensions for Section 1031 exchanges.

As a result, taxpayers living in designated disaster areas throughout California — now encompassing 57 out of 58 counties — filed their returns with a balance due, with plans to make a final payment by the postponed dates.

Unfortunately, red tape got in the way of what should have been a simple provision. According to the IRS, notice and demand documents are a legal requirement. The federal law generally requires the agency to send the “notice and demand” letter within 60 days of income tax assessment. And the moment the IRS processes a return, your tax is assessed.

To pay or not to pay?

So, in a move that was perplexing to many, the IRS subsequently followed its normal collection procedures, mailing the dreaded initial collection notice and demand known as Notice CP14 — which reflected an incorrect due date for those who had been granted disaster relief. The notice warned taxpayers to pay within 21 days of the date of the notice — or 10 days for balances of $100,000 or more. The notice also stated that interest and penalties would accrue after the due date on the letter — this was also inaccurate as those covered by disaster declarations are not required to pay prior to Aug. 15 or Oct. 16, depending on the disaster area.

To rectify the problem, the IRS added a short paragraph — buried on the back of page four of the Notice CP14 — which essentially tells taxpayers to disregard the notice. Not surprisingly, this updated information did not resolve the issue, but only led to more bewilderment and questions.

Furthering the confusion, the IRS has provided consistently inconsistent information regarding the extended tax deadlines for Californians — changing deadlines as well as making frequent amendments and updates to disaster relief provisions.

California disaster relief explained

To help clarify the process and ongoing updates, following is a recap of the IRS’s recent disaster relief for Californians, which applies to individuals, business entities, quarterly payroll and excise taxes as well as passthrough entity elective tax:

The IRS is offering relief to any area designated by the Federal Emergency Management Agency, including 57 California counties.

For those residing in Modoc and Shasta counties, the deadline is Aug. 15. And for the rest of the state — with the exception of Lassen County, which is not entitled to any disaster relief, the deadline is Oct. 16, 2023. The deadline applies not just to amounts due for 2022, but also estimated tax payments for the first two to three quarters of 2023.

Eligible taxpayers will also have until Oct. 16, 2023 to make 2022 contributions to their IRAs and health savings accounts.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area, so taxpayers do not need to contact the agency to get this relief.

In addition, under Revenue Procedure 2018-58, the four-day and 180-day time periods under Section 1031 has been extended if the relinquished property (or replacement property in a reverse exchange) is sold on or after Jan. 8, 2023. The 45-day identification period and 180-day exchange period was extended up to 120 days or until May 15, 2023 — whichever is later. However, the postponement will not extend beyond the due date (including extensions) of the taxpayer’s return.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or the return for the prior year (2022, normally filed this tax season). The taxpayer must write the FEMA declaration number – 3691-EM – on any return claiming a loss.

Conclusion

The IRS has since updated the demand notices to include a special insert explaining that “the payment date listed in the letter does not apply to those covered by a disaster declaration, and the disaster dates remain in effect.” In short, California taxpayers who live in designated disaster areas can discard the collection notices, which contain an incorrect due date. The correct due date is on the IRS website.

If a taxpayer is still unclear about the ramifications of the notice and demand letter — or about any of the changes in the IRS’s disaster relief provisions — it is prudent to reach out to the IRS directly.

Phil Jelsma is a partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3).