Before A Hurricane Hits, Here's How to Protect Your Tax, Insurance and Business Records

Before A Hurricane Hits, Here’s How to Protect Your Tax, Insurance and Business Records

Late last night, Hurricane Dorian became a Category 4 hurricane with the maximum sustained winds of near 145 mph (225 km/h). Dorian is expected to remain a powerful hurricane and will likely make landfall on the U.S. East Coast later this week – bringing flooding rains and heavy winds. While the storm is unpredictable, the National Hurricane Center has advised folks in the path of the storm to have a hurricane plan in place and to monitor the storm closely. At the same time, the Internal Revenue Service (IRS) is reminding those individuals and businesses in other parts of the country that it’s a good time to create or update their emergency preparedness plans.

Your emergency plan should also include ways to protect the things that you own, including valuables. Here are some things to keep in mind:

  • Protect original documents. Records you should keep include bank statements, tax returns, deeds, and insurance policies (for more, click here).
  • Make sure you keep your documents in a safe place. There is no single “safe place” for records: it depends on your lifestyle. In my case, it’s a mix of keeping records above-ground (basements in this part of the world can be damp) and away from prying eyes and sticky fingers (since we have kids). You’ll want to consider not only moisture, but pests, sun-bleaching, and other nature-related alterations when making decisions about where to store documents.
  • Records should also be in easy to retrieve. I don’t recommend safe deposit boxes for tax and other business documents because they can be inconvenient. Locking file cabinets and home safes (fireproof is best) are good alternatives.
  • Consider scanning select records and storing them electronically. The IRS has accepted scanned receipts since 1997, a policy that was memorialized by Rev. Proc. 97–22 (downloads as a PDF). Be sure that your scanned or electronic receipts are as accurate as paper records. Your records must be organized, and you must be able to produce them in a hard copy form if needed.
  • Better safe than sorry. If you rely on the cloud for offline storage, be sure that it’s both secure and that there’s a dependable backup system. Make sure that your advisors do the same (more here).
  • Do not assume that your tax professional will retain sufficient copies of your records for you. It’s your responsibility to produce documentation to the IRS upon request so don’t toss out your information because you assume that you can get them from your accountant or tax preparer.
  • Have a backup plan. Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. While you can always order tax transcripts and tax histories from the IRS in a pinch (more here), you’re at their mercy as to availability, accuracy, and completeness. Additionally, the IRS doesn’t retain supporting documentation, such as receipts and donor letters – that’s your job – and you may need those to substantiate deductions and credits.
  • Keep friends and family in the loop. Once you secure your records, make an extra set of key documents to keep with a family member or trusted friend.
  • Memorialize your property. All property, especially expensive items, should be recorded. Take pictures or videos of the contents of your home or business, especially high-value items. Documentation can help support insurance claims, as well as any tax benefits like a casualty loss. Remember that the deduction for personal casualty and theft losses is repealed for the tax years 2018 through 2025 except for those losses attributable to a federal disaster as declared by the President. For more on casualty losses after a disaster, click here.
  • Ask about flood insurance. Flood damage is rarely covered under your homeowners or renters insurance policy. According to FEMA, the cost of flood insurance is $700/year for the average flood insurance policy, while the cost of flood damage is $43,000 for the average flood insurance claim.
  • Tuck some cash away. The ultimate rainy day fund could be a few dollars stashed away. Banks and ATMs may close during an emergency, so having cash on hand can be useful.
  • Don’t be hesitant to take advantage of available resources. The IRS has a disaster loss workbook for individuals (Publication 584, Casualty, Disaster, and Theft Loss Workbook) that can help you compile lists of belongings.

If you have a business, consider these extra steps:

  • Have a plan. Have a readiness plan for your business and share it with key employees and other advisors. The Department of Homeland Security offers tips and resources on ready.gov to help you craft an emergency plan suitable for your situation.
  • Break out your pencils. If you don’t have time to take photographs or videos of your business, sketch an outline of the inside and outside of your location and fill in the details (for example, where is the copier located?).
  • Make sure that copies of your federal, state and local tax returns are in a secure location. This includes sales tax reports, payroll tax returns, and business licenses from the city or county.
  • Review Insurance Coverage. Not having enough insurance can lead to financial loss. Understand what your policy covers and what it does not, and ask about risk mitigation.
  • Think about how you will pay creditors, including tax authorities, and employees. Be aware of deadlines and check with tax agencies, like the IRS, for possible extensions and relief.
  • If you use a payroll service provider, ask your provider about a fiduciary bond. The bond could protect you in the event of default by the payroll service provider. (You can also create an EFTPS.gov account to monitor payroll tax deposits and sign up for email alerts.)
  • Don’t be hesitant to take advantage of available resources. The IRS has a disaster-loss workbook for businesses (Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook), too. The book can be a resource for compiling a list of business equipment.

After a disaster, a taxpayer impacted by a disaster may qualify for some relief (you can check here to see if your area has been declared for individual assistance). For more on tax issues, check out the tax relief page on the IRS website or call 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.

Hurricanes, tornados and other natural disasters can be more than an inconvenience: they can result in loss of life, property and livelihoods. I grew up in coastal North Carolina and I’ve seen the impact of those storms many times. I know that a one-size plan doesn’t fit all, and your needs can vary. But one thing remains constant: It’s important to be prepared. Take steps now to protect your home, business and family. And let’s be careful out there.