In the People First Initiative (Notice 2020-23, dated March 25, 2020), the IRS extended a number of due dates for taxpayers who had items due to be paid, filed or submitted, after March 31 and on or before July 15 (the “Suspension Period”). Since all of these items were extended to July 15, 2020, it means these items are due to be paid, filed or submitted by that date and taxpayers need to ensure that any and all items with a due date during this Suspension Period are ready to go by the expiration of this period.
This two-part article will walk through the various requirements that were suspended until July 15, and suggest what taxpayers should be doing now to make sure they are ready to meet the extended due date. Part I will cover aspects that are applicable primarily to individual taxpayers. Part II will cover aspects applicable primarily to business taxpayers. In either instance, waiting too long to get started could put taxpayers at risk of not being able to meet the July 15 due date, with the potential for interest and penalties to accumulate until the particular requirement is satisfied. This article will not discuss state tax implications, as not every state has agreed to conform to the People First Initiative. Readers should be aware of how their respective states have reacted to the COVID-19 pandemic and adjusted their due dates, if at all.
Despite popular misconceptions, the due date for payment of a prior year’s income tax liability (in this case, 2019) for individuals is always April 15, and there are generally no extensions available. Although a taxpayer is able to extend the filing deadline, the payment deadline is typically fixed and any payment made after April 15 is generally subject to interest and penalties. However, with respect to 2019 income tax liabilities, the April 15th payment due date has been suspended until July 15, 2020, without interest or penalties. The due dates for estimated tax payments for the first and second quarters of 2020 (which would otherwise be April 15 and June 15, respectively) have also been suspended until July 15, 2020. Taxpayers should be prepared to make a single payment on or before July 15, 2020 in an amount that covers both the first and second quarter estimated taxes for 2020. Taxpayers should also note that the relief afforded during the Suspension Period does not affect the estimated tax requirements or estimated tax penalty for taxable year 2019. In other words, the extended July 15 deadline does not help taxpayers who failed to make estimated tax payments that were due in 2019 (including the payment due on January 15, 2020) – those taxpayers should make those payments immediately to avoid additional interest and penalties.
There is no current provision for further suspension of these payment deadlines. Note that although, as discussed below, an individual taxpayer will be able to extend the filing deadline for the 2019 income tax return to October 15, 2020, payment of any income tax liability remains due July 15. Note also that inability to pay has traditionally not constituted reasonable cause to avoid a late payment penalty (and late estimated tax penalty), so to the extent possible, taxpayers should be saving funds to enable payment of the balance of 2019 income taxes, as well as first and second quarter estimated taxes, by July 15. The IRS website does suggest alternative payment arrangements, such as an installment agreement, an offer in compromise, or having the liability determined to be currently not collectible. In light of the COVID-19 pandemic, it is possible that the IRS may issue additional guidance on an inability to pay due to loss of income, but at this time, there is no indication that any such guidance will be forthcoming.
Estate, gift, and generation-skipping tax payments that were due during the Suspension Period are now due on July 15, 2020.
Although not explicitly stated in Notice 2020-23, the extension to July 15, 2020 also covers the following matters:
- Contributing to an individual retirement account (IRA).
- Contributing to a health savings account (HSA).
- Contributing to an Archer medical savings account (Archer MSA).
- Contributing to the Coverdell education savings account (Coverdell ESA).
- Repaying a mistaken 2019 HSA distribution.
- Reporting and paying the 10% additional tax due on amounts includible in gross income from a distribution from an IRA or workplace-based retirement plan in 2019.
Taxpayers who had profits from businesses activities outside of the U.S. prior to 2018 were likely subject to the §965 transition tax. The §965 transition tax payment is among the payments whose deadline was extended to July 15, 2020. For most taxpayers, whose taxable year is the calendar year, taxable year 2017 was the inclusion year for purposes of the §965 transition tax liability. For taxpayers who elected under §965(h) to pay the transition tax in eight (8) annual installments beginning with the 2017 taxable year, the payment of the third installment (for the 2019 taxable year), which otherwise would have been due on April 15, 2020, has been extended to July 15, 2020. Taxpayers who are required to make this installment payment need to do so by July 15, 2020, in order to avoid default under the installment payment arrangement, which would accelerate payment for all of the remaining unpaid installments.
Income Tax Return Filings
The due date for all 2019 individual income tax returns has been extended from April 15 to July 15. A taxpayer must either file an income tax return by that date, or file an extension form (Form 4868) by that date to extend the return due date to the October 15 filing deadline, which has not been extended. Again, as noted above, the further extension of the due date to file the return does NOT extend the due date to pay the tax due for 2019 (which is July 15). Even if a taxpayer plans to extend the due date of the return to Oct. 15, taxpayers should be gathering and organizing income tax return information and working on return preparation in order to determine the amount that needs to be paid by July 15. Keep in mind that, if a taxpayer is also required to submit international reporting forms, such as Forms 8938, 3520, 5471, etc., those need to be filed by July 15, or the extended due date of Oct. 15. The due date for FinCen Form 114, the so-called FBAR form, is automatically extended to Oct. 15.
Other Tax Return Filings
Any estate tax return (Form 706) or gift tax return (Form 709) that was due during the Suspension Period, is not due until July 15, 2020. Similar to income tax return filing requirements, taxpayers who have these types of returns should be working on compiling the information needed to make sure that a full and complete return is ready to be submitted on or before July 15, 2020, unless an additional extension of time to file is available.
Unclaimed 2016 Refund
If a taxpayer has not yet filed the 2016 income tax return, or did file a return but believes that the 2016 income taxes were overpaid, the time to claim a refund due for 2016 would normally have expired on April 15, 2020. This date was also extended to July 15, 2020. So, any taxpayer with an unfiled 2016 return for which credits are pending (or needs to file an amended return to claim a refund) needs to prepare and submit that return by July 15 in order to obtain the overpayment, either as a refund or a credit against the 2017, 2018 or 2019 tax liabilities. Needless to say, there can always be an additional liability due once a previously unfiled return is prepared but, in any event, the taxpayer should prepare and file the return no matter the end result.
If a taxpayer has submitted to the IRS an Offer in Compromise and the agency requested additional information to support the amount of the Offer, that information is now due by July 15, 2020 if the response date was during the Suspension Period. If a taxpayer is unable to meet the July 15 deadline, the taxpayer should contact the IRS Offer Specialist to request more time. Failure to meet the deadline puts a taxpayer at risk of having the IRS deny the Offer and retain any payments made as a deposit.
On Going Audits
If a taxpayer is in the midst of an audit, and the IRS requested information with a due date during the Suspension Period, the information is due to be submitted by July 15, 2020. Failure to provide the requested information could result in an adverse audit determination, and the incurrence of additional fees and costs to sustain the taxpayer’s tax return position. Other than to protect the 3-year statute of limitations on making an assessment, the IRS should not be contacting a taxpayer during the Suspension Period unless the taxpayer has agreed to be contacted. If the information requested is not ready to be submitted to the IRS agent by July 15, taxpayers should contact the agent to explain the circumstances and request additional time.
Ongoing Collection Matters
During the Suspension Period, the IRS should not be contacting the taxpayer, recording notices of federal tax lien, or levying on any property, unless a “jeopardy” situation exists, such as efforts to hide assets, etc. The IRS will also take steps to protect the 10-year statute of limitations on collection. If the IRS requested information with a due date during the Suspension Period, the information is now due on July 15, 2020 and taxpayers should be preparing to provide that information or seeking an extension. As with an audit, if the taxpayer is unable to gather all of the requested information by July 15, the taxpayer should contact the revenue officer to explain the circumstances and request additional time.
Opportunity Zone Investment Deadline
The Opportunity Zone program was added to the tax Code by the Tax Cuts and Jobs Act of 2017. In Notice 2020-23, the IRS provided that if the 180-day period for investing eligible gains into a Qualified Opportunity Fund (QOF) would otherwise expire during the Suspension Period, the 180-day period is automatically extended until July 15, 2020. A taxpayer with eligible gain that needs to be invested by the July 15 deadline should be actively searching for an existing QOF into which to invest or working on the creation of a new entity to function as a QOF. The IRS has been silent with respect to other OZ deadlines and timeframes that have been impacted by the Covid-19 pandemic (e.g., the 30-month substantial improvement requirement).
Pursuant to Notice 2020-23, any person performing a time-sensitive action which is due to be performed on or after April 1, 2020, and before July 15, 2020, has until July 15, 2020 to do so. For taxpayers engaged in a §1031 like-kind exchange, the time-sensitive actions that qualify for the July 15, 2020, extension relief include the following:
- If a taxpayer’s 45-day period to identify replacement property (in the case of a “forward” exchange), or relinquished property (in the case of a “reverse” exchange), expires on or after April 1, 2020, and before July 15, 2020, the taxpayer has until July 15, 2020, to complete the identification; or
- If the taxpayer’s 180-day period to purchase replacement property (in the case of a “forward” exchange), or to sell relinquished property (in the case of a “reverse” exchange), expires on or after April 1, 2020, and before July 15, 2020, the taxpayer has until July 15, 2020, to complete the exchange.
The July 15, 2020, extension relief described above is automatic and requires no further action by the taxpayer, other than to make sure that they are able to take the required action by July 15, 2020.
In part II of this client advisory, we will highlight the July 15, 2020, items that apply to business entities (such as corporations and partnerships).
Our tax attorneys are available to assist you or your clients in making sure the July 15, 2020, deadline is met.