Tom Talks Taxes - March 2, 2023
How taxpayers can benefit from extended California tax postponements
The IRS recently extended the §7508A postponements for most of California and parts of Alabama and Georgia from May 15, 2023 to October 16, 2023. Please check the IRS link to determine if a taxpayer is an affected taxpayer in a qualifying county.
A taxpayer with a principal place of abode in a designated county qualifies; however, additional criteria for who is an affected taxpayer may allow other taxpayers to benefit.
While the California Franchise Tax Board (FTB) has not officially confirmed it would follow the IRS’s further postponement, California generally does conform to IRS disaster postponements.
The most common tax actions now postponed to October 16, 2023 include the following:
2022 Form 1065 and 1120S due March 15, 2023
2022 Form 1040 due April 18, 2023
4th quarter 2022 estimated tax payment due January 15, 2023
1st quarter 2023 estimated tax payment due April 18, 2023
2nd quarter 2023 estimated tax payment due June 15, 2023
3rd quarter 2023 estimated tax payment due September 15, 2023
2022 Form 1040 balance due payment due April 18, 2023
The above list is not all-inclusive; most time-sensitive tax actions required during the postponement period are now postponed to October 16, 2023.
This will cause most California tax professionals to pivot their workflow for this tax season. It also creates an opportunity to be a hero to your clients by telling them how they can earn extra income at the IRS’s expense due to this action.
Under §6511(e)(1), the IRS generally has to pay interest on an original tax return refund it does not issue within 45 days of the unextended due date or the filing date, whichever is later. However, in Program Manager Technical Advice 2020-04, the IRS explains that §7508A, which governs disaster postponements, requires the payment of interest on refunds of withholding and estimated tax payments starting from the original due date of the return until the issuance of the refund by the IRS.
Let’s adjust the example in the above PMTA to a California taxpayer subject to the 2023 postponement:
An individual lives in a California county affected by a Presidentially declared natural disaster that began on December 27, 2022. Pursuant to §7508A(a), the Secretary announces that the period up to October 16, 2023 will be disregarded for purposes of determining, among other things, whether a return was timely filed for tax year 2022. Specifically, individual taxpayers who reside in the county are granted additional time to file an individual tax return for tax year 2022 until October 16, 2023.
An individual taxpayer who was affected by the disaster files its 2022 return on October 16, 2023, six months after the original deadline. The taxpayer made payments through withholding during 2022, which were deemed paid on April 15, 2023, and resulted in an overpayment for tax year 2022 as of that date. The Service pays a refund on November 16, 2023, 30 days after the return was filed.
The Service will pay interest on the overpayment. The 45-day rule of §6611(e) does not bar the payment of interest even though the refund was paid in 30 days. Also, the late return rule of §6611(b)(3) does not limit the time period for which overpayment interest will be calculated even though the return was filed after the original due date and without extension. Interest will be calculated from the date of overpayment (April 15, 2023) until the refund date on November 16, 2023. This includes the six month period that was disregarded for purposes of determining whether the return was timely filed.
Under this interpretation of §7508A, the IRS paid interest on tax year 2019 refunds when the 2020 tax return was filed during the 2020 COVID-19 postponement period.
There are two reasons why this 2023 postponement is materially different than the 2020 and 2021 COVID-19 postponements:
IRS interest rates are now much higher at 7% (and may go to 8% later in the year), and
The postponement period, during which the interest accrues, is longer.
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For every $1,000 of refund paid on November 16, 2023, the total interest paid is $42.09, assuming the IRS interest rate remains 7%. You can use that number to estimate the value of delaying the filing of a refund return to October 16, 2023.
There is little value to the delay for small refunds; for large refunds, the risk-free 7% return may represent several hundred dollars of interest. Ultimately, the tax professional must triage who might benefit most from a filing delay and let the taxpayer make an informed decision.
Now let’s talk about estimated tax payments. Due to the postponement, the first three estimated tax payments for tax year 2023 are not due until October 16, 2023. There is no reason to pay them before October 16; the taxpayer can earn interest on those amounts by delaying payment. There is no risk of the §6654 estimated tax penalty on those payments, provided they are paid by October 16, 2023.
Here is an example to show the potential value of this idea. Let’s assume the taxpayer buys a Treasury bill of appropriate duration so that the money is locked away when the payment is ordinarily due and becomes available in mid-October to be paid to the IRS. Of course, the funds could be kept in any interest-bearing investment the taxpayer chooses, such as the Vanguard Treasury Money Market Account.
Let’s also assume each estimated tax payment is $5,000, and the Treasury bills acquired pay their most recent yields:
2023, 1st quarter: 26-week Treasury bill, yield 4.915%, interest is $124.24
2023, 2nd quarter: 17-week Treasury bill, yield 4.830%, interest is $79.83
2023, 3rd quarter: 4-week Treasury bill, yield 4.515%, interest is $17.56
Treasury bills do not have a coupon; the taxpayer purchases the Treasury bill at a discount and receives the face value upon maturity. For example, for the 1st quarter of 2023, the taxpayer would pay $4,875.76 for the 26-week Treasury bill and receive $5,000 upon maturity.
In this example, delaying the three $5,000 payments until October 16, 2023 earns the taxpayer $221.63 in interest; if using Treasury bills, that interest is also exempt from state and local income tax, which is especially beneficial in California due to high individual income tax rates. Since the taxpayer handles the logistics for this strategy independently, simply informing all taxpayers of the delayed payment option and the potential income-earning benefits is relatively straightforward.
The same strategy can be used for the 2022 Form 1040 balance due payment. There is no benefit to the taxpayer from paying the IRS a day before required by law.
Here is a personal example: in December 2022, I estimated the balance due on my 2022 Form 1040 (yes, I never have a refund — no free loans to the Treasury) and put the necessary cash in a 17-week Treasury bill that will mature on April 11, 2023. Using this strategy, I made a three-digit amount of interest and wasn’t tempted to pay my tax bill early to get it off my to-do list.
To reiterate — this strategy isn’t material for everyone. Still, the interest earned can be significant for taxpayers with large refunds (and do not need the funds immediately) or large payments required this year.
I’ll close with a practice management observation. If your practice is too frenzied (e.g., fifteen 45-minute appointments per day and everyone gets filed that day) or too large to contemplate offering this to a client who can significantly benefit, are you structured in a way that is in the client’s best interest?
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The IRS press release does not list the tax forms affected. Is there a link for that? Specifically wondering about 1041s.
Also - what about states that piggyback on the federal 4868? I have lots of clients who file in other states (Oregon comes to mind) and I don't normally have to extend Oregon since they don't require their own extension if 4868 is filed. Do I need to file the Oregon extension or are they going to follow the 1040 postponed due date?
Thanks Tom for laying it out so well.