March 2020
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Don't Get Too Excited About COVID-19 Tax Filing Relief

In an effort to mitigate problems caused by the current COVID-19 pandemic, the U.S. Treasury Secretary has announced that the IRS will permit delays in making certain tax payments. Some states are taking, or making plans to take, similar actions. The delays, once placed in effect, will be helpful only to the extent the taxing agency does not already have the taxpayer's money.

  Tax Payment Deadlines.

The taxing authorities are very flexible about tax return filings, normally allowing extensions of 5 or 6 months past the normal due date. However, they are not flexible about tax payments: typically tax must be paid by the normal due date even if a return is not filed, and a sufficiently large underpayment can result in tax penalties and even invalidation of the extension of time to file.

Due date payments in most cases are not large because taxpayers have already paid their taxes, either by periodic wage withholding or through estimated tax payments, with the last such payment generally due no later than 15 days after the end of the taxable year. Some taxpayers that have experienced substantial increases in taxable income are permitted to calculate their estimated taxes on the basis of the previous year's income, deferring full payment to the return due date (although still not the extended due date), but those are relatively unusual cases involving relatively small taxpayers.

Thus, for most taxpayers, no later than 15 days after the end of the taxable year, all or nearly all required tax has been paid. An extension of the payment deadline is of no further use to those taxpayers.

  Announced Extension Of Tax Payment Deadlines.

The U.S. Treasury Secretary has announced that taxpayers will be able to take advantage of a 90-delay to pay taxes owed on last year's tax returns without penalty or interest, with stated limits of $10M of tax for corporations and $1M of tax for individuals.

The government has not published any official guidance on the mechanics of the delay, so nobody really knows how it is expected to work. The IRS could waive penalties by making a blanket finding that all such delays were the result of "reasonable cause," which would be within the IRS's power. However, due dates for tax payments and interest charges are imposed by statute and the government does not have the power to change them by administrative action. Accordingly, it seems possible that if and when authoritative guidance is promulgated, it will provide for abatement of penalties but not interest.

There are other unanswered questions. For example, what happens to a taxpayer that has failed to make its required estimated tax payments? Does that taxpayer get to delay payment until 90 days after the tax filing deadline with no penalty or interest? That would appear to be rewarding bad behavior. Alternatively, is the taxpayer penalized and charged interest from the date of the estimated tax underpayment to the filing deadline, and then forgiven further penalty (and maybe interest) for the next 90 days? That seems more fair, but complicated.

In short, the Treasury has a few issues to think through if it intends to make good on the Secretary's verbal statement.

It does not appear that there is any intention to reduce or delay withholding or estimated tax payments for the current taxable year, although in the current economic climate the issue of paying tax on profits may be irrelevant to many taxpayers.

  State Payment Delays.

Several states and localities have declared their intention to do something to assist taxpayers impeded by COVID-19 from timely filing their returns or paying their taxes. Some jurisdictions are planning to do so independently; others plan to coordinate with federal procedures once those are announced.

Some of the state and local procedures may be of more material benefit than the federal delay because they may apply to employment-based taxes that have not already been paid over to the government.

While some of the state and local delays may be automatic, it appears that others may depend on a factual showing of COVID-19 related hardship or impediment.

  Conclusion.

It will be worth keeping an eye on the nature of the COVID-19 relief the IRS and state taxing agencies end up providing. However, absent additional developments, it appears that only relatively rare taxpayers will materially benefit from the relief.

If you have questions about these issues or their effect on you or your business, please feel free to contact TaxGroup Partners at (213)873-1200 or e-mail us at info@TaxGroupPartners.com or visit our website at TaxGroupPartners.com.
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