Learn more about tax extensions and avoiding late-payment penalties.
Find out how extensions affect contributions to IRAs.
Learn about penalties for not prepaying the minimum amount on estimated tax payments for the first two quarters of 2020.
Find out how the extension affects individual refund claims for the 2016 tax year.
Find out when the next deadline is for Foreign Account Reporting Requirements (FBAR).
Due to the COVID-19 emergency, the IRS gave taxpayers an automatic three-month extension. Taxpayers have a July 15th deadline to file their 2019 tax returns and pay their 2019 taxes. Other tax actions normally due on April 15 had similar extensions. So, with July 15th fast approaching, it is important to understand a few things. The 15th is more than just the deadline for filing your 2019 tax return. It is also the deadline for other things tax. Fiducial has a rundown.
1040 Extension
Those who cannot file their 2019 individual 1040 tax return by the July 15th deadline need to file a Form 4868 extension. This will give them until October 15th to file the return. If you want to avoid late payment penalties and interest, you should pay the tax liability shown on the extension with the extension form. The IRS disregarded penalties, interest, or additions to tax for failure to pay federal income taxes during the April 15–to–July 15 extension-period window, but these will begin to accrue on July 16, 2020.
CAUTION: While the Form 4868 extension is an extension for filing, it is not an extension for paying your tax liability. The Form 4868 instructions say (and tax courts have ruled) that for an extension to be valid, a taxpayer must properly estimate their tax liability. You then must enter that tax liability on the form, and file the extension by July 15th this year.
Penalties
The monthly penalty for not filing the 1040 tax return by the July 15th deadline is 4½ percent of the tax due for late filing and ½ percent of the tax due for late payment. The maximum cumulative penalty rate is 25%. However, the ½ percent per month for late payment continues until you pay the tax.
A minimum penalty also exists for 2019 returns not filed within 60 days of the return due date, including extensions. That penalty is the lesser of $435 or the amount due on the 2019 tax return.
Note: If you do not owe or you will receive a refund, you will pay no penalty. The IRS bases penalties on a percentage of the tax due. So, if you have no tax due, then the IRS can assess no penalty.
The IRS also charges interest on late payments and penalties. The rate is subject to quarterly adjustment. Currently, the annual rate is 5% of the amount owed, with interest accumulating daily.
Contributions to a Roth or Traditional IRA for the 2019 Tax Year
July 15th is the last day for making 2019 contributions to Roth or traditional IRAs. Form 4868 does not provide an extension for making IRA contributions.
Individual Estimated Tax Payments for the First Two Quarters of 2020
Normally, the first installment of estimated taxes for a tax year is due on April 15th. The second installment comes due on June 15th. For 2020, the IRS extended these due dates to July 15th, to coincide with the other COVID-19-related extensions. Taxpayers who fail to prepay the minimum (“safe harbor”) amount may be subject to a penalty for underpayment of the estimated tax.
The IRS bases this penalty on the interest on the underpayment. They calculate this by using the short-term federal rate plus 3 percentage points. They compute the penalty on a quarter-by-quarter basis. Therefore, even people who have prepaid the correct overall amount for the year may have to pay a penalty if the they do not pay the amounts proportionally or in a timely way. However, for 2020, penalties for failure to pay federal income taxes during the April 15–to–July 15 period will be disregarded.
More on safe harbor prepayment
Federal tax law does provide ways to avoid the underpayment penalty. For instance, if the underpayment equals less than $1,000 (referred to as the de minimis amount), no penalty is assessed. In addition, two options exist for safe-harbor prepayments:
1. The first is based on the total tax on the current year’s return. There is no penalty when prepayments (including both withholding and estimated payments) equal or exceed 90% of the current year’s tax.
2. The second is based on the total tax amount on the return for the preceding tax year. This does not include credits for prepayments. This is generally set at 100% of the prior year’s tax liability. However, taxpayers with adjusted gross income exceeding $150,000 (or $75,000 for married taxpayers filing separately) must pay 110% of the prior year’s tax liability to meet the safe-harbor test.
Individual Refund Claims for the 2016 Tax Year
The regular three-year statute of limitations for 2016 tax returns normally would have expired on April 15th of this year. However, due to the COVID-19 emergency, the IRS extended the statute of limitations to July 15th. Thus, no refund will be granted for 2016 returns (original or amended) filed after July 15th. An exception exists if you carry a net operating loss to 2016. In this case, the usual three-year limitation for claiming a refund won’t apply as long as the statute is still open for the year when the net operating loss (NOL) occurred.
However, taxpayers could risk missing out on the refundable Earned Income Tax Credit, the refundable American Opportunity Tax Credit for college tuition, and the refundable child credit for the 2016 tax year if they do not file before the statute of limitations ends. Caution: The statute does not apply to balances due for unfiled 2016 returns.
Foreign Account Reporting Requirements (FBAR)
For each United States person who has a financial interest in, signature, or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, that person must report that relationship to the U.S. government during each calendar year. People commonly refer to this reporting requirement as FBAR. It has the same due date as the individual 1040 returns.
This report is submitted online to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and the FBAR’s annual due date is April 15th. However, FinCEN grants an automatic extension to October 15th each year. So, if you missed the April due date this year, you still have until October 15th to file the FBAR. Severe penalties exist for failing to file an FBAR. Additionally, individuals should not overlook overseas family accounts on which they are named as account holders, or online foreign gambling accounts. If in doubt, call your Fiducial representative for more information.
Next Steps
If your income tax return is still pending because of missing information, please forward that information to your Fiducial representative as quickly as possible so that we can make sure your return meets the July 15th deadline. Don’t procrastinate. Keep in mind that the last week before the due date can be very hectic, and your returns may not be completed in time if you wait until the last minute. If you know that the missing information cannot be obtained before the July 15th deadline, please let us know right away so that we can prepare an extension request (and 2020 estimated tax vouchers, if needed).
If you have not yet completed your returns, we can help you estimate your taxes, and/or file an extension. Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.