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Protect Tax and Other Financial Records Before Disaster Strikes

Sept. 2, 2021, 8:46 AM

Hurricane season is shaping up to be busier than usual—just as forecast by NOAA’s Climate Prediction Center. To date, there have been a dozen named storms in the Atlantic Ocean, nearly keeping pace with the 2020 record-breaking season.

It seems fitting, then, that September kicks off National Preparedness Month. The annual outreach event started in 2004 by the Federal Emergency Management Agency to help Americans prepare for and respond to all types of emergencies, including natural disasters and potential terrorist attacks.

I learned the basics for some kinds of emergency preparedness—like getting ready for a hurricane—early in my childhood. I grew up in coastal North Carolina and spent many a fall day hunkered down in the hallway, away from windows, waiting for a major storm to pass. Before it arrived, my parents and I would check water supplies, make sure our flashlights had fresh batteries, and ensure that we had enough food to get us through a long-term power failure. Since my brother and I have September birthdays, my mom did an extra check for emergency celebratory ingredients: You develop a particular appreciation for cake cooked over a gas flame outdoors.

You can find tips for creating a preparedness plan if a disaster strikes—but alas, no birthday cake recipes—at https://www.ready.gov/.

Hurricane Florence churning through the Atlantic Ocean toward the U.S. East Coast in September 2018.
Photographer: NOAA via Getty Images

And while it’s true that preparedness should focus on making sure that you and your family remain safe, there’s more to consider. You should also have a plan for protecting your property—including your tax and financial records. While securing your documents may not be top of mind in a storm, having access to those records can help you more quickly take advantage of available relief after a disaster.

That’s why—during September—the IRS is encouraging taxpayers to create or update an emergency preparedness plan. Here are some tips to get you started.

Find a safe place for storing original documents, including bank statements, tax returns, deeds, and insurance policies. There is no single “safe place” for records. It depends on your location and lifestyle. In my case, keeping records above-ground is important: Basements aren’t always a great place to store papers due to the potential for flooding. You’ll want to consider not only humidity but the presence of pests, the potential for sun bleaching, and other nature-related alterations when making decisions about where to store documents.

Make sure that records are easily located. While you don’t want original documents out in the open, don’t make them too difficult to locate. I don’t recommend safe deposit boxes for tax and other business documents because they can be inconvenient. Locked file cabinets or home safes can be good alternatives.

Make copies. Copies of key documents like birth certificates, deeds, insurance policies, and tax returns can be stored with a family member or trusted friend away from a potential disaster area.

Scan important documents. The IRS has accepted scanned receipts since 1997, a policy that was memorialized by Rev. Proc. 97–22. For tax purposes, your scanned or electronic receipts must be as accurate as paper records, and you must be able to index, store, preserve, retrieve, and reproduce the records. Your records should be organized and easily convertible to hard copy form if required.

Be thoughtful about storage. Scanning documents to your hard drive isn’t enough, since, in a disaster, a soaked computer won’t be very useful. Back up records to external hard drives that you store away from your home, or rely on the cloud. Just make sure that any offline storage is encrypted and secure—and use a password that will keep your data safe.

Document the contents of your home or business, especially high-value items. You don’t need a professional: cell phones are just fine for photos and videos. Annotate—either by voice or text—the photos or video so that insurance adjusters, tax professionals, and others can easily understand what they’re looking at. In a pinch, you can sketch pictures of floor plans and rooms if you don’t have photos. Documentation can help support insurance claims, as well as any tax benefits like a casualty loss. Keep in mind that the rules for personal casualty and theft losses have changed: Losses incurred after Dec. 31, 2017, must be due to a federally declared disaster to be eligible for a deduction.

Do not assume that your tax professional will keep copies of your records for you. While tax professionals may have professional standards that require them to retain some records, it’s your responsibility to produce records to the IRS upon request. Additionally, your tax professional may not have access to all of your documentation. Don’t be careless with your information because you assume that you can get records from your accountant or tax preparer.

Don’t rely on the IRS as a substitute. While you can order tax transcripts and account histories from the IRS online, you can’t make assumptions about the immediate availability or accuracy. Additionally, the IRS doesn’t have access to your supporting documentation, such as receipts and charity donor letters that may be required to substantiate deductions and credits. It’s best to scan your supporting documents and keep those together with the corresponding return.

Consider switching to online banking. If you haven’t already done so, sign up to receive statements electronically. It’s fast, and it’s accessible on the go if you have to evacuate. And if you depend on Social Security or other government benefits, consider direct deposit so that there’s no slowdown in an emergency.

Keep a list of useful contact information. It’s good to keep a running list of important numbers. Better yet, consider storing key numbers for your bank, insurance agent, and tax professional—as well as the IRS Disaster Assistance Hotline (1-866-562-5227)— in your cell.

Don’t hesitate to take advantage of available resources. For more help, check out the Emergency Financial First Aid Kit, a joint publication available in several languages from Operation Hope and FEMA.

This is a weekly column from Kelly Phillips Erb, the Taxgirl.

Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

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