The Internal Revenue Service has offered information on how to elect to apply an overpayment on 2020 taxes against estimated taxes for the first quarter of 2021, which are still due on April 15.
The IRS updated a
IRS Commissioner Charles Rettig faced some tough questions about the matter during a Senate Finance Committee hearing Tuesday about the tax season, but he continued to insist that no extension would be provided on quarterly estimated payments. Lawmakers have introduced legislation that could allow for a delay, but with the April 15 deadline just a day away, accountants are filing the quarterly estimated payments, even while questions have lingered about what to do in some instances, such as overpayments of 2020 taxes. The passage of new tax laws such as the CARES Act, the Consolidated Appropriations Act and the American Rescue Plan Act has made it difficult in some instances to estimate quarterly taxes, especially with so many Americans losing income last year. The IRS guidance offers some help on that matter.
“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: (a) the date(s) of payment, and (b) the extent to which an overpayment exists as of April 15, 2021,” said the IRS. “An extension of time to file has no effect on either the date of payment or the date on which an overpayment exists.”
The IRS added that to the extent that there turns out to be an overpayment of 2020 taxes as of April 15, 2021 (because payments made on or before April 15, 2021, exceeded the taxpayer’s 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 Oct. 15, 2021.
“To the extent an overpayment of the 2020 tax is attributable to a payment made after April 15, 2021 (including any payment made after April 15, 2021, but on or before May 17, 2021), that overpayment would not be available for crediting as of April 15, 2021, and would be applied as of the payment received date, not as of April 15, 2021,” the IRS added before providing three examples to illustrate how this might work.
The information can be helpful for some tax professionals who have been wondering about these situations for some clients. “The IRS was entering a bit of uncharted territory since we hadn’t before faced a due date that had been moved back from the original due date by the agency itself, while leaving the next year’s estimate date untouched,” wrote Ed Zollars of Thomas Zollars & Lynch in his
Rettig was challenged during Tuesday’s hearing by Sen. Maria Cantwell, D-Washington, about why the IRS wasn’t extending the due date for quarterly estimated taxes until May 17. “You have mom and pop businesses who have a hard time anyway complying with complex regulations and now we make it seem like they don’t have to file until May, but then all of a sudden they start the process and realize, oh, they were supposed to make a payment anyway,” she said. “I think it’s unnecessarily confusing. You also probably have some 1099 individuals, if you talk about the gig worker, that aren’t that sophisticated a tax filer and they’re also confused by this deadline. A deadline that’s May 17 but really requires people to do something beforehand is, at least for this segment of the population, confusing. I just don’t get it why we’re creating this level of uncertainty in this environment, particularly when there’s probably other complexity related to the COVID packages and what people might have gotten under the COVID packages. And then you create more work for yourself later in the process when people have overpaid or underpaid, and then we have to figure that out later. It just seems to me that adds a lot of confusion when we could say to everybody, ‘OK, the deadline is May 17.’”
Rettig insisted that wasn’t the only deadline that the IRS didn’t extend. “There were numerous other deadlines that weren’t extended,” he said. “The only deadline extended was the filing of the Form 1040 and that affected taxpayers associated with the 1040. We did not extend any other deadlines. Last year was different. This year is different.”
The IRS actually did extend several other deadlines until May 17 as recently as March 31, however (
Rettig said earlier in the hearing that it would be up to the Treasury Department to extend the payment deadline, and Cantwell said she and Sen. Pat Toomey, R-Pennsylvania, who had also asked Rettig about the matter, would push the case with the Treasury. Legislation was introduced last week in the House by Rep. Lloyd Smucker, R-Pennsylvania, to extend the deadline for estimated tax payments for the first quarter until May 17 (
“I think Congress is going to have to act,” said AICPA vice president of taxation Edward Karl. “They have already started last week in the House. I think if the IRS was going to act, they would have already.”
Some tax practitioners would still like to see an extension, even though the April 15 deadline is coming up Thursday. “The IRS should have aligned the estimated tax payment deadline with the May 17 individual tax return due date,” said John Kawamoto, head partner for PP&Co's tax department. “The Treasury Department’s rationale for not extending the estimated tax due date was illogical and contradicts its reasons for extending the 2020 individual tax return due date. If taxpayers require additional time to file their 2020 tax return, logic dictates they also need additional time to calculate 2021 estimated tax payments. Frankly, another month probably doesn’t make much of a difference to either taxpayers or the Treasury Department, but it would definitely make a difference to tax professionals.”
To be sure, the extension of the main tax filing deadline for most taxpayers has been helpful for practitioners. “The extension of time was warranted and has been useful,” said Kawamoto. “The Treasury Department just last week provided guidance allowing states to conform to federal law without impacting the stimulus funding the States received. For example, California has been sitting on legislation since February that would allow for partial deductibility of PPP loan expenditures. Without this legislation, we have had to extend many business returns, and this has caused delays downstream for many individual taxpayers.”
However, there is a downside to the extensions, he acknowledged. “From a personal standpoint, the effects of extending the deadline are somewhat mixed,” said Kawamoto. “While it may be helpful to have additional time to prepare and file returns, many tax professionals could use a break. The numerous tax law changes and the impact the pandemic has had on us personally and professionally has been significant. The extension to May 17 has effectively taken away a month of much-needed rest, which does not help our industry. Similar to the IRS, we have other client and business initiatives that need attention, many of which continue to be deprioritized. We are operating as if April 15 is still the deadline. We continue to push to complete as many returns as possible by April 15, hoping to take some of the pressure off of the May 17 deadline. This will hopefully allow our team to rest and recharge before the September and October deadlines.”
