IRS, State of California, Extend Tax Filing Deadline for Disaster-Affected Counties

Update: In early June, the IRS issued a notice reassuring California taxpayers in counties covered by disaster declarations that they continue to have an automatic extension until October 16, 2023, to file and pay their taxes. The agency had sent notices requesting payments from taxpayers who had a balance due, which claimed interest and penalties will be applied. The IRS has apologized to affected California taxpayers and notified those that receive balance due notices that they do not need to call the agency or their tax professional.

To provide relief for individuals and businesses located in areas affected by the recent winter storms, the IRS and the State of California have postponed the filing and payment deadlines falling on or after January 8, 2023, until October 16, 2023.

The automatic extension applies to taxpayers living, working, or storing tax records in any California county except Imperial, Kern, Lassen, Modoc, Plumas, Shasta, or Sierra.

Prepare Returns as Soon as Possible

While the deferral offers potential benefits for taxpayers affected by the disasters, it is beneficial for taxpayers to continue to work with their tax professionals to prepare their returns on their regular schedule to evaluate their tax strategies and understand the effect on cash flow.

Since the extended deadline applies to the 2022 tax returns and payments, certain estimated tax payments for 2023 as well as contributions to IRAs and health savings accounts, careful planning is necessary. Taxpayers expecting to owe may decide to defer payment for opportunities to save and fund investments, but they should carefully plan their cash flow needs to ensure funds will be available to make the tax payments in October.

The cash flow burden from October 2023 to January 2024 will likely be significant for those choosing to defer payments. Year-end tax strategies often require cash to accelerate tax deductions into the current tax year and 2023 fourth quarter tax estimates that will be due on the normal schedule from December 2023 to January 2024.

Taxpayers that file multiple state returns should proceed with their normal filing and payment schedule since states not affected by disasters are not following the IRS and California in offering automatic deferrals.

Similarly, taxpayers expecting a refund should file as soon as possible to receive a timely payment.

Watch for Late Notices

Despite the automatic filing extension, taxpayers may erroneously receive notices that assess penalties for late filing and payment. If you receive such a notice, contact the respective agency or your tax professional to resolve the error. The extension impacts most of the California population, so expect additional costs and government delays in processing corrections.

Automatic relief from the IRS and California will be based on the address presented on the filed return. Taxpayers should confirm that the address on their filed tax return is in one of the affected counties to minimize the likelihood of a notice.

R&D Credit Implications

The extension may also provide benefits for taxpayers affected by recent changes to IRC Sec. 174 Research & Development capitalization. Late relief to delay the capitalization requirement for R&D expenses may still be provided for the 2022 tax year. The extended filing deadline provides additional time for resolution and payment relief for affected companies. However, R&D capitalization can have a significant impact, so contact your tax professional to understand the pending tax liability.

Disaster Loss Deductions

Taxpayers who experienced casualty losses in the presidentially declared disaster counties may claim a deduction for a disaster loss. This loss can be claimed when filing an original or amended 2022 tax return.

Contact us to learn more about the opportunities and potential challenges associated with the extension. We can help you carefully consider the deadlines and plan your cash flow needs accordingly.