AICPA asks IRS to automate property replacement extensions after disasters

The American Institute of CPAs wants the Internal Revenue Service to develop an automated procedure to expedite extension requests for taxpayers who need to replace property destroyed by federally declared disasters.

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In a letter Monday to Amalia Colbert, commissioner of the IRS’s Small Business/Self-Employed Division, AICPA Tax Executive Committee chair Cheri Freeh suggested the IRS should develop an automated way to process extension requests for taxpayers affected by disasters to replace involuntarily converted property under Section 1033 of the Tax Code. The recommended process could reduce the IRS’s need to allocate resources to handle these types of requests and give taxpayers greater certainty when they’re trying to replace property destroyed by disasters.

“For many years, our members have experienced fluctuations and inconsistencies in the IRS’s ability to timely approve section 1033 extensions,” Freeh wrote. “This inconsistency leaves taxpayers with a significant level of uncertainty and needless hesitation when replacing destroyed property.”

The request comes amid cutbacks over the past year at the Federal Emergency Management Agency despite a string of wildfires, snowstorms, hurricanes, tornadoes and other natural disasters, as well as a reduction of about 25% of the IRS’s staff. Last week, President Trump signed a bipartisan bill that aligns the deadline for claiming prior-year tax refunds or credits with the extended filing period granted to taxpayers affected by natural disasters. 

Section 1033(h) of the Internal Revenue Code provides four- and two-year replacement periods for personal residences and business or investment property damaged by a federally declared disaster, respectively. Taxpayers can ask for an extension to such replacement periods if they have reasonable cause for the delay and send a request before the replacement period expires. The main issue with extension requests, though, has been whether the taxpayer gets an approval before the original replacement period expires.

The AICPA is asking the IRS to take advantage of its existing online taxpayer accounts to streamline the extension request submissions and notifications for Section 1033 requests and set up an automated procedure to approve those requests.

As an alternative, the AICPA has another suggestion, recommending the IRS consider automatic approval of extension requests that have been pending for more than a particular period of time (such as 30 to 60 days), as long as certain streamlined criteria are met.

“Many taxpayers and practitioners have encountered challenges and delays when awaiting extension request approvals, with some quickly receiving approval within 30 to 60 days from the date of submission while others receive approval months after expiration of the replacement period,” said Daniel Hauffe, senior manager for tax policy and advocacy with the AICPA, in a statement Tuesday. “Automating this process would significantly reduce the IRS’s need to allocate resources to these types of requests and afford taxpayers and practitioners certainty when attempting to replace property destroyed by disasters.”