The news media are wringing their hands over the coming tax return filing and payment deadline. For individuals, that deadline is April 15. Not only must your 2019 federal income tax return be filed by that date, but the taxes must be paid by then also. The question I'm now hearing on a daily basis is what will people do who cannot file or pay because of the extensive disruption due to the COVID-19 crisis?
Treasury Secretary Steven Mnuchin prevailed on President Trump to issue a declaration extending the tax payment deadline. Mnuchin stated last week 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, the Treasury announced an extension of the payment deadline.
According to Secretary Mnuchin, the IRS is pushing back the April 15 tax payment deadline, giving individuals and some businesses ninety extra days to pay their taxes. Individuals can defer up to $1 million of tax liability and corporations get an extension on up to $10 million. "All you have to do is file your taxes," he said. "You'll automatically not get charged interest and penalties."
This will certainly help some taxpayers, but note the caveat that returns must be filed to get this relief. Moreover, the payment extension is limited to ninety days. It's important to note that the tax code and existing IRS procedures already provide several very simple, effective and viable options for those who need more time to file and pay – for whatever reasons.
Let me address the existing procedures in turn.
A Filing Extension
The IRS currently offers, and always has offered, a one-time extension to file a personal tax return. 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 on or before April 15. You file the form in accordance with the instructions for the form. The relief just extended by Treasury does not affect the filing deadline.
As long as Form 4868 is filed by the April 15 deadline, the application gets you six additional months – up to October 15 – 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 will get you six additional months to file your return, 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 recent move addresses this problem, but only partially. The payment extension offered by the Treasury is limited to three months. 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 April 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 the 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 to pay the tax – without penalties. However, the interest nevertheless applies.
The Key Program Differences
The key differences between the new Treasury policy and the longstanding Form 1127 rules are:
- Form 1127 must be filed on or before April 15 to get relief;
- Form 1127 relief is available for up to six months, not three;
- Interest applies under the 1127 rules but not the new three-month policy;
- No application is required under the three-month policy, simply file your tax return by April 15 and relief is automatic;
- You lose the option for the six-month policy if you don't file Form 1127 on or before April 15, even if you get an extension of time to file your return.
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 borderline hysteria, the agency would actually put out more options to help calm the public. But no. That falls to me.
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. Again, 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 the list are personal or family health problems, problems growing from a fire, flood, hurricane, or other natural disasters, 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, (links/italics) Dan Pilla's Small Business Tax Guide and The IRS Problem Solver each has 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.