Tax day concept. The USA tax due date marked on the calendar.
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Despite increasing pressure from Congressional Democrats and requests from professional organizations including the American Institute of Certified Public Accountants (AICPA) IRS Commissioner Charles Rettig remains adamant about keeping the April 15 filing deadline exactly where it is. And that’s all we know. We don’t know why. Here is a theory. It is only a theory. Nevertheless, recent events seem to be bearing it out.
Congress and the President are getting ready for the latest Covid relief bill to be signed into law. The bill includes another round of economic impact payments (EIPs) and an expanded and advanced Child Tax Credit among other items. Most of these items will affect taxpayers 2021 tax returns (the ones that will be filed in early 2022). Some, however, will start much sooner: the next round of EIPs and the Child Tax Credit advances. Some are retroactive. The final legislation is expected to be signed as early as today, but definitely before current federal unemployment benefits expire on March 14. What does this have to do with the filing deadline? Well, if the deadline gets extended to either June 15 or July 15 (as happened last year) the IRS will be faced with implementing Round 3 EIPs and the advanced Child Tax Credit payments in what will amount to the middle of filing season. That is, in a word, suboptimal.
Also suboptimal is the number of small partnerships and S-corporations whose accounting professionals are currently trying to parse the finer points of Paycheck Protection Program (PPP) loan forgiveness and its interplay with the Employee Retention Credit (ERC). The guidance for both has been a moving target from inception and continues to change even as PPP Round 3 has been rolled out. The deadline for filing entity returns for partnerships and S-corps (Forms 1065 and 1120-S, respectively) is March 15. Shareholders and partners in these entities receive a Form K1 from the entity that must be reported on their individual Form 1040. That’s not much turnaround time between the deadline for entities to issue a K1 and getting the K1 onto the associated Form 1040. Ask me how I know.
It’s the tax and accounting professionals who are trying to help clients determine the optimal PPP/ERC combination, apply for PPP Round 3, and finish their clients’ entity returns who really need more time. It is now March 9, 2021. Last year’s extended deadline was announced on March 20, 2020 (after the entity deadline had passed). An extension for entity returns seems unlikely and, even if it happens, won’t be much help. Many tax practitioners have mentioned on social media that that they will be extending many, if not most, of their clients’ entity returns (until the September 15 deadline) to ensure that they are accurately prepared. That means many K1s will come in too late to meet the April 15 individual filing deadline. But how many is that? Well, of the over 250 million 2019 returns filed fewer than 10 million were for S-corporations or partnerships. IRS statistics for 2018 (the most recent year for which data are available) indicate that the number of 1040s with Schedule E, Part II, Line 28 (where such things are reported) completed was around 12 million for both partnerships and S-corporations combined. Compared to the total for individual 1040s filed in 2018 (almost 153 million) that is a small percentage. The numbers and the percentages seem low, but even doubled or tripled it’s still a relatively small number of returns compared to the overall number of individual 1040s that get filed.
Perhaps Commissioner Rettig is reluctant to extend the filing deadline because he believes (possibly correctly) that the vast majority of individual 1040 filers should be able to file on time given that tax professionals and the IRS (while still not operating at full capacity) are not completely shut down as many were in late March of 2020. Getting the majority of individual 1040s filed on time could allow the IRS to re-direct resources to other Congressional priorities that are currently on the way. Taxpayers who cannot meet the April 15 filing deadline or who would like to wait to see how the issue with retroactive non-taxability of some unemployment benefits will be managed can always file a Form 4868 to extend their deadline to file their return until October 15.
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Unfortunately while filing an extension extends the filing deadline, it does not extend the payment deadline. And late payments mean automatic notices. Automatic notices that require a written or faxed response or a phone call, none of which the IRS currently has the resources to manage. Even if the IRS were to be magically restored to pre-Covid operations levels they are facing a backlog of unprocessed returns, correspondence related to automatic notices that continue to be mailed, and possibly an influx of amended 2020 returns. More notices and responses are the last thing anyone needs right now, taxpayers, tax practitioners, or the IRS. What may be needed much more than an extension of the individual filing deadline is automatic penalty abatement through October 15 and (please!) a cessation of automatic notice generation until the mail backlog is cleared. Of course, we haven’t heard anything from the Commissioner on that either.