Tax Day in a normal year can be stressful for people who owe the government money.
But with the deadline finally at hand, many individuals and businesses are caught in a bind they can no longer put off. Even filing for an extension requires paying the estimated amount of tax owed from 2019, and they may not have the money because of jobs or income lost during the Covid-19 pandemic.
More than a third of taxpayers surveyed in May by audit defense company TaxAudit said they didn’t have the resources to pay 2019 taxes owed, despite having an extra three months.
“We believe there will be too many people finding themselves in hot water and unable to pay,” said Edward Karl, vice president of taxation of the American Institute of CPAs.
AICPA in a letter sent to the IRS and Treasury earlier this month asked the government to automatically waive failure-to-file and failure-to-pay penalties for the millions of taxpayers they expect are struggling to fulfill their tax obligations because of Covid-19. The IRS hasn’t said it plans to offer this kind of relief, but the AICPA plans to follow up with the agency after Wednesday, Karl said.
The Treasury Department extended the deadline three months from the original April due date to make it easier for people to pull together the paperwork and cash they need to file and pay their taxes during the pandemic. But Covid-19 infections have surged to record highs during that time in many states across the country, and unemployment claims are still being filed at a rate of more than 1 million a week.
Tax professionals are urging people to file their returns or request a filing extension by Wednesday, even if they can’t pay all of the tax they owe or have incomplete records because of coronavirus-related challenges. That will help them avoid a large chunk of penalties that can reach nearly half of their unpaid taxes.
“The failure-to-file penalty is worse than the failure-to-pay penalty,” said Robert Kerr, executive vice president of the National Association of Enrolled Agents. “The rookie error that people make because they’re afraid and because they don’t have professional help, is they say, ‘Oh, gosh, I can’t pay that so I’m not going to file.’”
The penalty the IRS charges for a late payment is generally 0.5% of the tax owed for each month, or partial month, the person doesn’t pay, and can go up to 25%. The failure-to-file penalty is 10 times greater at 5% of the unpaid taxes. The combined penalty if both apply is 5%—4.5% for late filing and 0.5% for late payment—maxing out at 47.5%.
Small business owners can be especially challenged to pay their bills by Wednesday because they have several due dates converging on the same day.
Individuals with ownership stakes in pass-through businesses—such as sole proprietorships, partnerships, or S corporations—have to pay quarterly estimated taxes throughout the year if they expect to owe tax of $1,000 or more when their return is filed.
The first and second quarter estimated payments for 2020 are due Wednesday because the IRS postponed the original deadlines. Those business owners also have to file and pay their 2019 taxes this week. If they don’t pay what they owe by the due date, they’ll face possible penalties and interest.
“It’s really put the taxpayer in a very difficult position,” said Kathy Brown, an enrolled agent who runs her own tax practice in Kentucky. Businesses, even those who have received Paycheck Protection Program loans from the government, are struggling to keep their doors open and make lease payments, so having to pay taxes just adds to their problems, she said.
Brown said she’s assisting seven small business clients who say they can’t pay all of what they owe by the due date. That’s in addition to about 30 others in that position that she’s already helped.
While her advice has varied, she’s told some clients to prioritize filing and pay as much of their 2019 taxes as they can—while accepting penalties and interest for underpayments—and put the 2020 estimated payments on the back burner for now. Those 2020 payments may be smaller for businesses because they earned so little when their operations were closed, Brown said.
Another tactic she’s recommending is that taxpayers allow the IRS to hold onto their stimulus checks so that the amount can be credited against any 2020 tax due.
Treasury has previously stressed that while individuals can request an extension to file their 2019 returns by Oct. 15, they still have to estimate their tax bill and pay what’s owed by the original due date or face interest and potential penalties.
When clients don’t have enough money to pay in full, tax professionals are urging them to at least file their returns and consider entering into a payment plan, such as an installment agreement, with the IRS.
That’s the easiest way to help clients who are having a hard time right now, said Nancy Remo, an enrolled agent who offers professional tax services in California.
AICPA, in its letter asking the IRS and Treasury to waive penalties, also asked the government to set up an expedited process to help taxpayers establish or revise an installment agreement based on their current financial circumstances.
But installment agreements don’t eliminate the sting of interest and penalties. Those will continue to be added to the amount owed until the balance is paid in full. Some taxpayers may be able to get their penalties abated by taking advantage of the IRS’s reasonable cause exception, which allows taxpayers to get relief if they have a sound reason for failing to pay their taxes when due.
But that creates more work for both taxpayers and an agency already facing a huge backlog after it temporarily closed facilities because of the virus. “It means the IRS will have to, we believe, process millions of requests for abatement,” Karl said.
The agency, when asked for comment, referred Bloomberg Tax to a June 29 news release that highlighted installment agreements and several other payment options for individuals and businesses. Treasury didn’t respond to a request for comment.
“The IRS understands that those affected by the coronavirus may not be able to pay their balances in full by July 15, but we have many payment options to help taxpayers,” IRS Commissioner Chuck Rettig said in the news release.