COVID-19 has prompted a delay in the payment deadline for any taxes owed with your tax return
You owe additional income tax with your tax return if your payroll withholding and any estimated tax payments do not cover the amount of total tax owed, as determined by your tax return. Amid the mass societal impact of the COVID-19 pandemic, on March 17 the US Treasury Secretary, Steven Mnuchin, announced in a wide-ranging press conference that individual taxpayers may delay for 90 days (to July 15) the payment of any federal tax that you owe with your tax return, up to $1 million, without interest and penalties. This announcement was followed by IRS Notice 2020-17, issued on March 18.
I’ve heard from IRS staffers that the Treasury and IRS will continue to issue guidance to clarify details, and perhaps mollify grumblings from tax preparers that the official due date needs to be extended. States that have income taxes are expected to make similar coronavirus provisions for their state tax returns, so be sure to check with your state’s tax agency/revenue department.
Don’t Confuse Payment With Filing
While the payment deadline has been extended to July 15, for now the tax-return filing deadline is still April 15, according to interpretations of the initial announcement or IRS notice by KPMG, CPA Practice Advisor, the AICPA, and Kelly Phillips Erb, a senior tax contributor at Forbes.com. If you expect a refund, you still want to file your tax return ASAP to get your refund from the IRS. If you expect to owe taxes, the sooner you complete your tax return the sooner you will know how much.
However, in reality the April 15 due date for federal tax returns may not even matter if you don’t owe any taxes with your tax return. The IRS penalty for the failure to file a tax return on time is based on the amount of actual taxes owed when you miss the filing deadline. There is no penalty for filing an individual tax return late when nothing is owed.
Here is the penalty calculation on the IRS website:
Failure to file: Internal Revenue Code §6651(a)(1)
- 5% of unpaid tax required to be reported
- Reduced by the “failure to pay” penalty amount for any month where both penalties apply
- Charged each month or part of a month the return is late, up to 5 months
- Applies for a full month, even if the return is filed less than 30 days late
- Income tax returns are subject to a minimum late filing penalty when filed more than 60 days after the return due date, including extensions. The minimum penalty is the LESSER of two amounts—100% of the tax required to be shown on the return that you didn’t pay on time, or a specific dollar amount that is adjusted annually for inflation. The specific dollar amounts are: $435 for returns due on or after 1/1/2020
Do You Need To File For An Extension?
Until the IRS guidance is clarified, you still need to request a filing extension if you cannot complete your tax return by April 15. Elliott Puretz, a CPA, tax-return preparer, and retired college accounting professor I know in the Boston area, is hoping that the delay will also apply to filing as well as paying, but in his interpretation that is not the case yet. This view is supported by FAQs from the Massachusetts Society of CPAs, which observe that the March 18 IRS guidance “does not change the April 15 filing deadline.” While you can still get an extension to delay the filing deadline (not the payment due date) to October 15, it remains unclear whether you could file an extension after April 15 and still postpone your filing deadline to October 15.
Audit Lookback Dates?
Another open issue is the date that the IRS would use to look back when performing an audit on a tax return. The IRS website states that the agency can include returns filed within the prior three years in an audit. “If we identify a substantial error,” the IRS continues, “we may add additional years. We usually don’t go back more than the last six years.” The date used is typically April 15, or later if an extension was filed. If tax payments are not due until July 15, which date would apply for the lookback? Hopefully that will be clarified too.
What About Estimated Taxes?
You typically make estimated tax payments if the withholding from your salary or supplemental wage income (e.g. stock option exercises, restricted stock/RSU vesting, a cash bonus) is much too low, if you’re self-employed, or if you have substantial income from other sources where there is no withholding (real estate sales, dividends, interest, capital gains). During the tax year, under the standard rules, to avoid penalties you pay the IRS either 90% of your expected tax bill or 100% of last year’s taxes (for adjusted gross incomes over $150,000, it is 110%). The due dates for the 2020 tax year are April 15, June 15, and September 15 of 2020 and January 15 of 2021.
The penalties for underpayment of estimated taxes are calculated on a quarterly basis, so you normally make estimated tax payments in the quarter when you earn the income. Although the IRS has not (yet) postponed the due dates for 2020 estimated taxes, it is good to see that the IRS notice of March 18 at least delays any penalties for individual taxpayers who don’t meet the April 15 due date.
For more guidance on withholding, estimated taxes, and tax returns, including those that involve stock compensation (e.g. stock options, restricted stock units, employee stock purchase plans), see the articles, FAQs, and annotated diagrams of IRS forms in the Tax Center at myStockOptions.com. As a fun challenge, test your knowledge with the tax-return quiz.