“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” — Will Rogers
Or every time the IRS postpones a filing deadline.
Last year in mid-March, the IRS issued Notice 2020-17, clarifying some of the uncertainties that remained after the initial IRS announcement that filing deadlines for 2019 taxes and payments would be extended. Yet despite several areas that required clarification last year, the IRS apparently did not learn its lesson, and for 2020 taxes, there remains ongoing confusion for what is extended under Notice 2021-21.
Estimated Tax Payments
Taxpayers will often pay more than is necessary for the current year’s taxes when filing an extension request, and choose to credit the overpayment to offset the first quarter estimated tax for the following year. This makes life easier because both requirements are satisfied with one filing and payment. Both payments are due April 15, and this mitigates the chance of a late payment penalty. The hitch with this year’s postponed filing date is that no one knows if this strategy still works.
The issue turns on what the IRS considers to be the payment date for the first quarter estimated taxes. Several sources indicate that the IRS will not treat the payment as having been made until the “due date” of the tax return. Revenue Ruling 99-40 provides:
If the overpayment occurs after the due date of the first installment of estimated tax for the succeeding taxable year, it may be credited only against an installment of estimated tax due on or after the date the overpayment was made.
The IRS held in Technical Advice Memorandum 200303012 and General Information Letter INFO 2002-0130 that the time when a year 1 overpayment “occurs” for purposes of year 2 estimated tax obligations is the due date of the year 1 return. Because the due date for 2020 individual income tax filing and payment obligations was postponed to May 17, 2021, the overpayment may be treated as occurring after the April 15, 2021, due date of the first installment of estimated tax. Under Rev. Rul. 99-40, the IRS might apply this overpayment to the second installment of estimated tax.
On the other hand, the IRS may take the position that the due date for filing the return was not extended, but merely postponed, and therefore the extension payment, or any overpayment on a return filed on or before April 15, 2021, cannot be credited to the first quarter estimated taxes. The logic for this position is that by reference to Sections 6511, 6513, 6512, and 6072, the “due date” for filing Form 1040 is April 15. Notice 2021-21 postponed the date for filing Form 1040 pursuant to power granted to the IRS by Section 7508A because of a federal disaster. Specifically, Section 7508A grants “Authority to postpone deadlines by reason of Presidentially declared disaster ….” What it does not do, however, is change “the last day prescribed for filing the return under section 6012 for such taxable year.” Under Section 6072(a), this last day for purposes of Section 6012 is April 15. Therefore, Section 6513 (time that payment of estimated tax payments are credited) refers to April 15 regardless of a postponement under Section 7508A.
The real problem lies in the fact that this is not a taxpayer decision. It is a decision the IRS will make and taxpayers will suffer the consequences. And in an update posted April 7, the IRS simply reiterated that estimated taxes are due April 15, without addressing the overpayment dilemma.
But on April 12, the IRS posted new guidance that puts this issue to rest. “If an individual taxpayer has a 2020 overpayment and elects to credit the 2020 overpayment against the 2021 estimated tax, the date on which the 2020 overpayment is applied against the 2021 estimated tax depends on: the date or dates of payment, and the extent to which an overpayment exists as of April 15, 2021. An extension of time to file has no effect on either the date of payment or the date on which an overpayment exists.”
“To the extent an overpayment of the 2020 tax exists as of April 15, 2021 (because payments made on or before April 15, 2021, exceed the 2020 tax liability), and the taxpayer makes a valid election to apply the overpayment to 2021 estimated tax, the overpayment would be applied as of April 15, 2021, whether the 2020 return is filed on April 15, May 17, or October 15, 2021.”
In Notice 2021-21, the IRS declined to postpone other time-sensitive acts that are required to occur on or before April 15, such as the filing and payment date for gift tax returns. This has created confusion about how to extend Form 709.
Ordinarily, the due date for filing Form 709 is extended by using Form 8892, assuming a taxpayer’s Form 1040 is not also being extended. Form 8892 provides on its face that taxpayers should not use it to request an extension for Form 709 if Form 4868 will be used to extend Form 1040. In that situation, the Form 4868 simultaneously requests an extension to file both Forms 1040 and 709. This dual extension results from Section 6075(b)(2): “Any extension of time granted the taxpayer for filing [Form 1040] shall be deemed to be also an extension of time granted the taxpayer for filing the return under section 6019 for such calendar year [Form 709].”
So we return to the “extension vs. postponement” conundrum. As discussed above, the IRS postponed the date for filing Form 1040 to May 17 based upon authority granted the IRS under Section 7508A. Importantly, the IRS used this authority to postpone the original filing date; the IRS did not alter or extend the statutorily imposed due date of the return. Section 6075(b)(2) relies on the application to extend the time to file Form 1040; it does not incorporate disaster-based postponements of the original due date to file Form 1040. This means that the original due date to file Form 709 and to pay any associated gift tax liability remains April 15, 2021.
So it appears taxpayers may fall into one of three filing categories. If you are filing your Form 1040 after April 15 and by May 17, you should probably file Form 8892 by April 15 to extend the gift tax return and submit any gift taxes due. If you are going to extend your Form 1040 by May 17 and you will owe gift tax, even though Form 8892 says don’t use it if you are filing Form 4868, you should probably file the Form 8892 by April 15 anyway, and pay the associated gift tax due. Finally, if you are extending the Form 1040 and you won’t owe any gift tax, you should be able to rely on the Form 4868 to extend the filing deadline for Form 709.
On April 8, the AICPA weighed in, taking the most conservative approach:
- In order to ensure that the 1st quarter 2021 estimate is credited to April 15, the taxpayer will need to pay the estimate on a Form 1040-ES or make an online payment directed to 2021 on or before April 15.
- To file an extension for a gift tax return (Form 709), Form 4868 or Form 8892 should be filed on or before April 15.
On April 9, the IRS reminded taxpayers that the extension until May 17 does not change the April 15 due date for filing a Report of Foreign Bank and Financial Accounts (FBAR). The confusion caused by this announcement is unnecessary, however, because the IRS confirms in the announcement that “filers missing the April 15 deadline will receive an automatic extension until October 15, 2021, to file the FBAR. They don’t need to request the extension.”
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Bill Smith is Managing Director for CBIZ MHM’s National Tax Office.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.