IRS extension leaves other headaches to solve

The IRS has extended the tax filing season by a month, but that decision didn’t resolve every challenge taxpayers and the agency are facing.

The agency announced Wednesday that the deadline for individuals to file their 2020 federal tax returns is now May 17 instead of April 15. That announcement came after lawmakers and tax preparers pushed for an extension in light of the logistical challenges of filing taxes during the pandemic and questions taxpayers have about provisions in various coronavirus relief laws.

Lawmakers and tax preparers think the extension is helpful but may be too limited. Additionally, the extension could exacerbate the difficulties that the IRS faces in implementing coronavirus relief legislation.

IRS Commissioner Charles Rettig said during a hearing held by the House Ways and Means Committee’s oversight subcommittee on Thursday that he doesn’t want the IRS to extend the filing deadline year after year.

“This cannot be a pattern,” he said.

The IRS is among the federal agencies that has been most impacted by the pandemic, because it has needed to carry out tax-filing seasons while also implementing key portions of the coronavirus relief measures Congress has passed, including the $1.9 trillion package that President Biden signed March 11.

Last year, the agency extended the tax filing and payment deadlines to July 15. This year’s tax-filing season started a couple of weeks later than usual because the agency needed to do programming after former President Trump signed a $900 billion relief package in late December.

The IRS had been hesitant to extend this year’s filing and payment deadlines as well, with Rettig telling lawmakers in February that extensions cause confusion for taxpayers and back up the agency. But the agency this past week announced a one-month extension, after facing pressure from lawmakers on both sides of the aisle. Lawmakers expressed concerns about the fact that taxpayers have questions about coronavirus relief laws and about the fact that the IRS has processed fewer tax returns this year than it had at the same time last year.

While lawmakers are happy that the IRS extended the deadline for individuals’ 2020 tax returns, they have signaled that they could ask for additional extensions in the future.

“We will continue to consult with the commissioner and will monitor IRS activities as the filing season progresses to determine if more time might be necessary,” Rep. Bill Pascrell (D-N.J.), chairman of the Ways and Means oversight panel, said at the start of Thursday’s hearing. “But for now, I appreciate the commissioner’s willingness to heed our calls for relief for our constituents.” 

Tax preparers have raised concerns about the IRS’s decision to only extend the deadline for individuals’ 2020 returns and not also extend the April 15 deadline for estimated tax payments for the first quarter of 2021. They said that failing to extend the estimated-payment deadline essentially could make the 2020 tax-return extension moot for some taxpayers.

“That’s an obvious problem that makes no sense, given that estimated tax payments are generally based on prior year information,” said Amie Kuntz, a CPA in the national tax office of RubinBrown. 

Estimated payments are typically made by self-employed individuals, independent contractors and small businesses owners. About 9.6 million individual tax returns for 2018 reported estimated tax payments, according to IRS data.

“The relief valve wasn’t opened very wide,” said Barry Melancon, president and CEO of the American Institute of CPAs.

Rettig said at Thursday’s hearing that the estimated payment deadline wasn’t extended in order to prevent wealthy individuals from avoiding interest and penalties.

“There’s a large contingent of wealthy individuals in this country who do not make their estimated payments and who essentially take the money that they should be paying in an estimated payment on a quarterly basis to the government and take the arbitrage and they invest it,” Rettig said. “We’re not going to give them a break of interest and penalties to do so.”

Rettig added that the IRS designed the extension it issued to focus on those who are most vulnerable. 

However, tax preparers said that there are many lower-income people who need to make estimated payments, such as gig-economy workers.

“A lot of the most vulnerable workers are self-employed,” Kuntz said.

The IRS has made substantial progress in implementing some aspects of Biden’s coronavirus relief law.

The agency announced Wednesday that it has already disbursed about 90 million of the stimulus payments authorized by the law — more than half of all the payments that are expected to be distributed. Additionally, Rettig said that he thinks the agency will be able to help households receive a tax break for unemployment benefits without requiring them to file amended tax returns.

But other aspects of the measure will be more difficult to implement. 

One of Democrats’ top priorities in the new relief law is a temporary expansion of the child tax credit (CTC). The law directs the IRS to establish a program in which it makes advance payments of the credit on a periodic basis starting in July. Democrats are hoping that the payments can be sent to families monthly.

Rettig said that the extension of the filing deadline gives the IRS less time to implement the advance payments of the CTC. He said that the same IRS employees that work on tax-return processing are also needed to establish a web portal that taxpayers can use to opt-out of the advance payments or provide the IRS with information about a change in their circumstances, such as the birth of a new child.

“I don’t have the resources to devote to that portal until filing season ends,” Rettig said.

Rettig said that the IRS hopes it can set up the program on advance payments of the CTC by July, but that the payments may not initially be issued on a monthly basis. He added that he hopes over time to move toward making the payments on a monthly basis.

“I think it might be a challenge to get it to monthly right out of the box, but we’re focused on trying to get these payments out to the people in a meaningful manner and a meaningful time frame,” he said. 

In addition to needing to implement the provision in Biden’s law on the CTC, the IRS also still needs to issue guidance providing clarity about relief programs for businesses created by previous rounds of legislation, such as the employee retention tax credit and the Paycheck Protection Program.

“There are several areas from previous bills where we’re waiting on definitive guidance,” Kuntz said. 

The IRS is carrying out this year’s filing season and implementing coronavirus relief legislation as it is still working to process tax returns filed last year. Rettig said that there are 2.4 million individual returns for 2019 that are currently in processing in the IRS’s system, as well as another 5 million returns for 2019 and 2020 where the agency is reaching out taxpayers for additional information.

“They’re in a tough situation and they still have a lot of work to do to get current,” said Mark Everson, who served as IRS commissioner from 2003 to 2007 and is now vice chairman of the tax consulting firm Alliantgroup.