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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.
Both Filing and Paying Deadlines Moved to July 15
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 a 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.
Tax Expert Dan Pilla talks with Pat Robertson about your tax filing and payment options on Thursday's 700 Club.
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."
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.
What to Do if You Need More Time
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.
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 simple 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 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."
Dan Pilla is the author of several books to help individuals and business owners navigate their way through the complicated IRS tax code. His most recent is Dan Pilla's Small Business Tax Guide. CBN viewers can get a copy at the discounted price of $24.99 by clicking HERE. It comes with a free consultation with Dan and almost immediate shipping.
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