Sorting Out the Tax Filing and Payment Deadlines: Evaluating All the Options

ANALYSIS

On March 13, President Trump issued an emergency declaration that, among other things, instructed the Secretary of the Treasury "to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency." What followed during the week of March 16 was an announcement regarding the deadlines for federal income tax return filings and tax payments.

As we know, the usual deadline for individuals is April 15. Historically, not only must a federal income tax return be filed by that date, but the tax must be paid by then also. 

Treasury Secretary Steven Mnuchin stated that a payment extension would be a "good stimulus" for small businesses and individuals affected by the economic fallout from the health crisis. On March 17, under the emergency authority granted by the President on March 13, the Treasury announced an extension of the tax payment (but not the tax filing) deadline. 

Then, on March 20, the President made yet another statement saying that the Treasury would issue new order extending both the return filing and the tax payment deadlines. See IRS Notice 2020-18, March 20, 2020. This statement gives more clarity to what was a confusing and fluid situation during the week of March 16. 

The first statement led to confusion because it extended the tax payment deadline by 90 days, but did not extend the tax filing deadline. Moreover, the extension applied only to individual income tax payments due in the amount of up to $1 million of tax liability and corporation tax liabilities of up to $10 million. 

Notice 2020-18 extends both the filing deadline and the payment deadline and removes the $1 million/$10 million cap on the amount of tax liability that can be deferred. In light of this Notice, and given the tax code's, and existing IRS, procedures that are already in place regarding filing and payment extensions, let's fully analyze the full scope of the simple, effective and viable options for those who need more time to file and pay—for whatever reasons. 

A Filing Extension

Notice 2020-18 extends the filing deadline of personal income tax returns, Forms 1040, to July 15, 2020. This is important because the previous extension issued by the Treasury did not cover return filings. Thus, under Notice 2020-18, your 2019 federal income tax return is now due on or before July 15, 2020. This extension applies to individuals as well as "a trust, estate, partnership, association, company or corporation." Notice, pg 2. This is a filing extension of three months. 

But that might not be enough time for people to file their income tax returns. In that case, it is important to understand that the IRS continues to offer, and always has offered, a one-time, six-month filing extension for personal tax returns. IRS Form 4868 is titled Application for Automatic Extension of Time to File Tax Return. As the title implies, the mere filing of this form entitles one to an automatic extension of time to file a federal tax return. Form 4868 must be filed by the due date of the return to be effective. In this case, the form must be filed by July 15, 2020. 

Businesses that need additional time must use Form 7004, Application for Automatic Extension of Time to File Certain Business Tax Returns. File either form in accordance with the instructions for the form.

As long as Form 4868 (or 7004) is filed by the July 15 deadline, the application gets you six additional months—up to January 15, 2021—in which to file. Moreover, the application is automatic. You don't need a reason. Just complete and file the simple form and—poof!—you have your extension. 

A Payment Extension

While the Form 4868 gets you six additional months to file your return, historically, the tax owed still must be paid by April 15, regardless of a filing extension. In fact, this is the real problem for most citizens, especially those who are likely to experience financial hardship due to economic disruption caused by the coronavirus. "What good is a filing extension," I'm asked, "if I still have to pay the tax by April 15th?" 

Good question. And in fact, for most people, the filing extension is a moot point because tax preparation is a very simply matter. About 70% of all tax returns are based solely on wage income with no itemized deductions. For these people—mostly wage earners—it's a matter of a half hour or so with their tax pro or commercial tax prep software and their return is done. Now comes the hard part—paying the tax. 

The Treasury's most recent move addresses this problem, but only partially. The payment extension granted by the Treasury is limited to three months—up to July 15, 2020. If that's all the time you need, great. If not, you need to consider the next option. 

Perhaps the best-kept secret in the tax code is the fact that the law already allows one to obtain an extension of time to pay taxes. For decades, the IRS has lied to the public about this fact. Why didn't Mnuchin or anybody from the IRS mention this to the public in the past two weeks? Furthermore, I promise you, not one tax pro in 5,000 knows this fact. 

Regardless, it is nevertheless true that Internal Revenue Code §6161(a)(1) gives the IRS discretion to grant an extension of time to pay of up to six months. And in the case of a taxpayer who is overseas, the extension may exceed six months. 

You seek the extension by filing IRS Form 1127, Application for Extension of Time to Pay Due to Hardship. This form must be filed on or before the due-date of the tax, which now is July 15. However, unlike Form 4868 and the new three-month policy, the application is not automatic. Rather, to win an extension, the applicant must show that the inability to pay the tax is due to "hardship." 

The term "hardship" is not defined in the form or instructions. However, it is defined in the tax regulations. Treasury Regulation §301.6343-1 generally defines hardship as the inability to pay necessary living expenses, which expenses are not lavish or extravagant under the circumstances. Thus, if one is suffering unemployment or underemployment due to the current health/economic crisis and must use all available resources to pay reasonable basic necessary living expenses, and is therefore unable to pay taxes on time, this constitutes "hardship" in its purest form.

In your application, explain specific facts to allow the reader to conclude that circumstances beyond your control put you into a position where you were unable to pay your taxes. If you and your spouse opted to buy new lawn furniture rather than pay your taxes, that is not "hardship." However, if fallout from the coronavirus madness caused serious disruption in your financial life, that is the essence of "hardship."
 
Provide any documents you have to support your claim. The more third-party documentation you have, such as a statement from your employer that you are laid off or your hours are cut, the better. Local news stories about the specific effects of the crisis in your area will also help. 

If the IRS grants the extension, you'll get up to six additional months (from July 15) to pay the tax—without penalties. However, the interest nevertheless applies. 

True to its natural propensities, the IRS has not said one word about the Form 1127 option. You would think that in the midst of this boarder line hysteria, the agency would actually put out more options to help calm the public. But no. That falls to me. 

The Filing and Payment Options at a Glance

The key differences between Notice 2020-18 policy and the IRS's longstanding filing and payment extension rules are as follows: 

• The filing deadline for filing all income tax returns is automatically extended to July 15, no application is necessary;
• A further filing extension of six months is available by submitted Form 4868 by the July 15 deadline;
• Businesses can use Form 7004 to get more time to file beyond the July 15 deadline;
• The tax payment deadline is automatically extended to July 15, no application is necessary and no cap on the amount of tax owed applies;
• A further extension of up to six months is available by submitting Form 1127 by the July 15 deadline;
• Interest and penalties are automatically waived through the July 15 deadline;
• Penalties for failure to file and failure to pay are waived for six additional months (beyond July 15) if Form 4868 is timely filed, and if the IRS grants additional time to pay per a timely filed Form 1127; 
• Interest (but not penalties) applies to taxes not paid by July 15, even if additional time is granted per Form 1127; 
• You lose the option for the additional six-month filing and payment options if you don't file Form 4868 (or Form 7004 for businesses) or Form 1127 on or before July 15.

What is NOT Covered by Notice 2020-18?

Notice 2020-18 covers only federal income tax return filings and tax payments. That includes self-employment tax payments and estimated payments owed by self-employed persons up to July 15. 

The automatic extension of three months does NOT cover any other federal tax returns or payments. For example, the extension does not cover the filing or payment of federal employment tax returns, such as Forms 940 and 941. These still must be filed on time. Moreover, employment tax deposits still must be paid on time and in full. Any delinquencies on these obligations will incur penalty and interest assessments beginning with day one of the delinquency. 

What About State Taxes?

Notice 2020-18 covers only federal income tax obligations. Any return filing and state tax payment obligations are subject to rules and procedures applicable to state governments. Some states are following the IRS in extending their deadlines but others need legislative action to do so. Still other states have their filing deadlines tied by law to the IRS's. In those states, a federal filing extension automatically extends the state's filing deadline. 

You need to check with your particular state to see whether and to what extent they are offering filing and payment relief. I suggest you check the web site of your state Department of Revenue for the latest news. 

Penalty Relief 

Even if the IRS does not grant an 1127 payment extension, or your payment delinquency extends beyond the three-month period, the failure to pay penalty is subject to abatement under certain circumstances. For example, the penalty must be canceled when the citizen demonstrates that the failure to pay was due to reasonable cause and not willful neglect. The challenge is to show that circumstances beyond your control put you into a position where you had to make the Hobson's choice between paying your taxes and feeding your family. Opting to feed your family in that situation does not constitute willful negligence or deliberate disregard of your tax obligations. 

In fact, the IRS's Penalty Handbook, Internal Revenue Manual part 20, discusses various facts and circumstances the IRS considers in determining whether to cancel delinquency penalties. At the top of list are personal or family health problems, problems growing from a fire, flood, hurricane or other natural disaster, or civil disturbances. Without question, the current national health crisis falls squarely within these guidelines. 

And should the IRS deny penalty relief because front end bureaucrats can't understand how uncontrollable factors affect people living in the real world, you have a right of appeal. 

My books, Dan Pilla's Small Business Tax Guide and The IRS Problem Solver each have a chapter explaining exactly how to get rid of IRS penalties, including how to use the right of appeal. I've used these procedures for decades. They work. And under the present situation, penalty abatement will be a no-brainer. 

Let's Have Some Calm 

We will come through this crisis just like America comes through every crisis we've ever faced. Free people are strong and resourceful. I was in the grocery store the other night and noticed that pallets stacked high with inventory of every description (yes, including toilet paper) were being pushed into the store from the loading dock as fast as they were being carried out the front door by customers. 

Don't let panic confuse your thinking. And when it comes to the IRS and your tax obligations, don't wring your hands over what might happen if you can't file or pay by April 15. You have options that are already fixed in the law. You don't have to rely on the magnanimity of government bureaucrats to save you. 

Take care of your family. Keep yourself and them safe. That is your first responsibility. Do it without fear or remorse. Then, follow the procedures I've outlined above. If you do, I assure you, the IRS will not make matters worse for you.