Should CPAs — and taxpayers — get an extra two months to file their federal income taxes? Does the tax season, which started late anyway, need to be extended until June 15?
The idea of a one-time, across-the-board extension makes a great deal of sense when you consider the extra long list of challenges and changes relating to the filing of 2020 tax returns, which remain due April 15.
One tax professional told me earlier this year that there's absolutely nothing clear and simple about this tax season.
The COVID-19 pandemic continues to put a limit on office hours and in-person appointments for tax preparation. Fortunately, a great deal of tax preparation can be done remotely. So that's a help.
Some call for tax-deadline extension
Many tax professionals think we're looking at too tight of a time squeeze.
The American Institute of CPAs is calling for extending the filing and payment deadline until June 15.
Democrats on the House Ways and Means Committee already requested that IRS Commissioner Charles Rettig extend the tax return filing season beyond April 15.
"It has come to our attention that, due to the ongoing pandemic, many Americans continue to face the same challenges that necessitated extending the filing season last year," according to a letter dated Feb. 18. The letter did not suggest a date for a new filing deadline.
Whether the Treasury Department and the Internal Revenue Service will make such a move with less than a month to go remains to be seen. But, again, many frustrated taxpayers can see how a two-month extension would make sense for 2020 returns.
The April 15 deadline applies to both filing a complete, accurate federal income tax return and paying the tax that is owed for 2020.
What does Form 4868 do?
Taxpayers can file a Form 4868 to receive an automatic six-month extension to file a return. But Form 4868 doesn’t extend the time to pay taxes. If you don’t pay the amount due by the regular due date, the IRS notes, you’ll owe interest. You may also be charged penalties.
How do you figure out the taxes due, though, when many rules changed only recently?
The IRS is still figuring out how to handle some big, last-minute changes, including a new waiver that allows consumers to avoid paying federal taxes in 2020 on a limited amount of jobless benefits. The IRS said some more updates will be coming soon to IRS.gov.
Small businesses are dealing with a host of payroll tax credits, as well as other COVID-19 relief, that can affect their taxes, too.
"We don't even know we can calculate the right amount of tax," said Jan Lewis, a member of the AICPA Tax Executive Committee.
"We are working as hard as we ever had to get these returns out," said Lewis, who is a CPA at Haddox Reid Eubank Betts in Jackson, Mississippi.
A two-month extension, she said, would enable the IRS to give more clarity to a variety of issues, particularly those concerning small businesses. Much guidance and information simply isn't available now to file complete and accurate returns, given the changes and the circumstances, she said.
The 2019 tax deadline was extended three months until July 15, 2020, without penalties and interest, last year due to the massive economic shutdowns that went into place to stem the spread of the coronavirus.
Last year's extension was announced on March 21, after President Donald Trump's emergency declaration associated with the spread of COVID-19 in the United States.
This year, thankfully, isn't as rattling as last March. Many but not all businesses are up and running. A vaccination effort is ongoing. Many people are more willing to be out and about, even though the pandemic continues.
How do you treat jobless benefits on 2020 tax returns?
Still, we're dealing with some pretty important tax changes that were part of three COVID-19 relief packages passed by Congress — one last spring, another in late December and now, the American Rescue Plan that went into law March 11.
Did you, for example, receive unemployment benefits during the sweeping shutdowns in the economy in 2020?
Typically, all unemployment benefits would be taxable.
But the American Rescue Plan provided that many taxpayers now are not required to pay taxes on up to $10,200 in unemployment benefits received last year. Yes, the changes are retroactive and went into place after some people already filed their 2020 federal income tax returns. Yes, it's confusing because this change went into place a month after the tax season began.
The exclusion is up to $10,200 of jobless benefits per person. You and your spouse, for example, can each exclude up to $10,200 of unemployment compensation if filing a joint return.
It is not a simple change. For example, if one spouse received $15,000 in jobless benefits but the other received just $1,000 in unemployment compensation in 2020, then the exclusion for tax purposes that the couple would receive would be $11,200 — not $16,000.
The special provision to waive taxes on some unemployment income applies to those who made less than $150,000 in adjusted gross income in 2020.
Warning: This new tax break applies only to unemployment benefits received in 2020 — not 2021. Plan to pay federal income tax on the full amount of jobless benefits received in 2021.
The latest change is a major tax break on 2020 tax returns for those who lost their job last year or faced a furlough. But how, exactly, are you going to be able to accurately file a 2020 tax return to claim it?
More: Who gets the third stimulus check, and when? Your COVID-19 relief questions, answered
Tax software programs were not updated as of Monday to reflect the money-saving change relating to jobless benefits. The IRS did release a worksheet with some instructions for the "New Exclusion of up to $10,200 of Unemployment Compensation."
When you're able to avoid claiming some jobless benefits as income, your adjusted gross income drops too. So other parts of your tax return could change. Some taxpayers could qualify for extra tax credits based on a lower income, and possibly even a bigger stimulus payout.
And that's just one of the many glitches and potential gotchas.
On Friday, the IRS stated: "The IRS is reviewing implementation plans for the newly enacted American Rescue Plan Act of 2021. Additional information about a new round of Economic Impact Payments, the expanded Child Tax Credit, including advance payments of the Child Tax Credit, and other tax provisions will be made available as soon as possible on IRS.gov. The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time."
Taxpayers must figure out what kind of money they received in their stimulus payments. The first one went out last year but the second one was sent out beginning in January.
CPAs continue to ask tax filers for information on how much money was received in those two stimulus rollouts, as that is needed to calculate any possible remaining Recovery Rebate Credit that is available on 2020 tax returns.
Tax season already sluggish
The tax season was delayed from the start. The IRS didn't even begin to accept and process tax returns until Feb. 12, which was already more than a two week delay.
As of March 5, the IRS had processed nearly 25% fewer tax returns than it did through March 6, 2020. There were 40 days in the filing season through March 6 last year, and 22 days of the filing season this year through March 5.
The IRS received 55.7 million returns through March 6, down 18% from the year ago time period.
James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, said tax filings could be down for several reasons. Some people who received unemployment benefits may owe taxes and are waiting to file their returns. Others could have been waiting to file their tax returns until the American Rescue Plan was passed by Congress in March. Others have COVID fatigue and find it harder to deal with their taxes.
And some are holding onto the hope, he said, that the tax filing deadline will be extended for all.
The IRS issued 36.05 million tax refunds through March 5, down 31.6% from the year ago period through March 6, 2020.
Should people procrastinate a bit here, simply on the hope that, maybe the federal government will listen to reason and extend the April 15 deadline a month or two? No, not at all.
The best advice remains to gather your forms, track down what you still need and start working on getting your taxes done.
But it's also essential to recognize that, if for example, you received unemployment benefits last year, the tax rules changed earlier this year and your tax software would not have been updated in February or early March. So you might need to wait a bit to file those returns as that software is expected to be updated soon.
IRS officials said Monday that more guidance will be available soon, for example, about what taxpayers need to do if they've already filed a federal income tax return but had jobless benefits last year that could now be exempt from some taxes. The IRS said taxpayers should not file amended returns just yet.
We're looking at yet another amazingly strange tax season — and there's not much any of us can do about that one, except maybe cross our fingers that we can get a bit more time to figure all of this out.
This article originally appeared on Detroit Free Press: April 15 deadline nears but CPAs and others want more time
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