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Updates:
- March 13 at 3 pm ET: Per Tax Talks, “President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the coronavirus. This declaration allows the Treasury Department and the IRS to extend the deadline for certain taxpayers and small businesses to pay taxes until December 31, 2020 as Treasury Secretary Steven Mnuchin suggested earlier this week.”
- Per Bloomberg Law News, (With this declaration) “the IRS can choose from a range of powers: abating penalties for failing to file or pay taxes, or postponing federal tax filing and payment deadlines without interest or penalties accruing, according to the agency’s Internal Revenue Manual posted on its website.”
- March 13 at 1 pm ET: The president will probably use federal emergency powers today to direct the Treasury Department to provide tax filing and late payment relief. I hope the Treasury Department considers the AICPA proposals. (See the AICPA coronavirus resource center and the AICPA state filing conformity chart that they will update.)
The Administration and Congressional leaders are negotiating fiscal-stimulus measures to provide relief for the coronavirus pandemic, which might include loosening rules for the April 15th tax deadline.
In his Oval Office speech on March 11, the president proposed tax-payment relief for “certain individuals and businesses.” That might be too narrow, and hopefully, this relief will apply to all taxpayers since the virus is spreading fast around the county and causing wide-spread economic harm. It would be challenging to identify “federally declared disaster areas” eligible for tax relief. Blanket across the board tax relief is warranted. Treasury Secretary Mnuchin said the delay would cover “virtually all Americans other than the super-rich.”
Under current law, individual taxpayers must file 2019 income tax returns or an automatic extension form 4868 by April 15, 2020. An extension filing delays the tax-filing deadline for six-months until October 15, 2020. However, the IRS and states want taxpayers to make 2019 tax payments on time by April 15, 2020. The IRS uses a complicated regime of penalties and interest charges to incentivize taxpayers to make tax payments by April 15.
If a taxpayer misses the April 15 deadline, the IRS charges them a “late-filing penalty” of 5% per month, up to a maximum of five months for a total penalty of 25%. It would be unconscionable for the IRS to charge a coronavirus victim such a hefty penalty because they couldn’t file a one-page extension on time. I expect that IRS relief should make this automatic extension genuinely “automatic” by doing away with a requirement to submit a form 4868.
The IRS “late-payment penalty” addresses when a taxpayer should make tax payments that are due. IRS coronavirus relief should loosen the late-penalty rules, too. Under current law, the IRS would charge a late-payment penalty if the taxpayer did not pay at least 90% of their tax liability by April 15. The late-payment penalty is 0.5% per month, up to five months for a maximum of 2.5%. The IRS allows the taxpayer to request abatement of late-payment and late-filing penalties based on a “reasonable cause.” Contracting coronavirus sounds like a reasonable cause. The IRS calculates penalties and interest based on the tax payment paid after April 15. The current interest rate on late payments is 4.5%.
Hopefully, states follow suit with the IRS and enact coordinated tax relief over the April 15 deadline. States might use a different payment percentage to avoid late-payment penalties.
Accounting industry group weighs in
The AICPA issued a press release AICPA Calls for Indiv. & Business Tax Relief Amid Coronavirus Pandemic, dated March 11, 2020. My partner Darren Neuschwander CPA serves on the AICPA Individual & Self-Employed Tax Technical Resource Panel, and Darren helped draft this AICPA letter. (Darren will be serving as the vice-chair of the panel effective May 21, 2020, for the 2020-2021 year.)
The AICPA letter recommended an automatic extension for all taxpayers, without having to submit form 4868. The AICPA also suggested reducing the 90% payment rule to 70%, figuring the IRS might then provide the relief to all taxpayers. The AICPA letter further recommends: “Waive interest through October 15, 2020; and waive underpayment penalties for 2020 estimated tax payments if paid by September 15, 2020.” See the letter for their other recommendations.
On CNBC this morning, Jim Cramer called for tax payment relief across the board for all taxpayers and businesses. It seems the public and media’s first impression of this story is that “no tax payments” will be due April 15 with an automatic extension. And, there will be 100%-relief for interest and all types of penalties. The fine-print of the penalty regime has always been confusing to many. Let’s wait to see the final tax law changes if any.
Special issues for traders
A 2020 Section 475 election is due by April 15, 2020, for individual traders eligible for trader tax status (TTS). (It’s March 16 for existing partnerships and S-Corps.) The 475-election procedure requires a taxpayer to attach a 2020 Section 475 election statement to their 2019 tax return or extension filing made by the April 15, 2020 deadline. The IRS might allow an automatic extension without a 4868 filing required, or they could extend the filing date altogether. However, I don’t expect the IRS to address 475 elections specifically. Therefore, it’s safer to mail the IRS a Form 4868 automatic extension and staple the 475-election statement to it by April 15, 2020, according to current law. Alternatively, file a complete 2019 tax return with the 475-election included by April 15. This year traders are counting on a 475 election to convert year-to-date capital losses into ordinary losses due to massive volatility in Q1 2020. (See Massive Market Losses? Elect 475 For Enormous Tax Savings.)
It’s worth noting that the late-payment penalty is small and sort of like a margin loan; a maximum amount of 2.5% isn’t that bad for six months’ use of money.
If you do choose to postpone tax payments, be careful not to risk your tax funds owed the IRS in the financial markets as that might compound your cash flow problems.
This tax relief is like interest forbearance where banks allow a delay in mortgage payments, which many financial institutions offered to do in this crisis. It’s time for the U.S. Treasury to provide tax-payment forbearance, too.
See our blog post on extensions from last year Tax Extensions: 12 Tips To Save You Money.
Please share this blog post with Administration and Congressional leaders.
Darren Neuschwander CPA contributed to this blog post.