Most have heard that IRS has extended the tax deadline this year to May 17th. You do not need to file an extension to use the May 17th deadline. This is now the deadline to file and/or pay your taxes without being considered late. The federal government, NYS, and PA have extended to this date. If you file in other states, verify your filing date. Many states have not followed this federal change and may be due on a different date.
If you cannot file your tax return by May 17th, you are eligible to file an extension to allow for filing until October 15th. An extension only gives you an extension to file your tax return, not an extension to pay your balance due. When you file the extension, if you anticipate you are going to owe taxes, you need to make a payment with your extension to avoid penalties.
Filing an extension stops you from incurring a late filing penalty if the return is filed by the extension due date. It will not prevent a late payment penalty. If you file an extension and have a balance when the return is complete, you will be charged a late payment penalty.
Estimated Tax Payments:
Even though the 2020 tax return deadline has been extended to May 17th, first-quarter estimated tax payments for federal are still due April 15th. If you make your estimated payment after April 15th, you could incur an estimated tax payment penalty for not paying on time. This is different than what happened with the 2020 estimated tax payments. They have not extended the filing date for estimated tax payments and they are still due April 15th.
NYS and PA have not extended their estimated tax payment date either and those payments are also due April 15th. For any other state, you need to determine if they followed the federal rules or did something different.
Unemployment Benefits:
In the American Rescue Plan signed by President Biden early this year, each taxpayer can exclude up to $10,200 of unemployment income. NYS is currently still deciding on whether if they will follow federal and not tax the first $10,200 of unemployment income or if they are going to tax the full amount.
If you filed your federal tax return before the American Rescue Plan was signed and you had unemployment income, do not amend your federal tax return. IRS will automatically adjust any returns with unemployment income to exclude this amount and refunds for the previously submitted returns will begin going out in May.
We are also hearing reports of individuals receiving Form 1099-G tax notices for unemployment benefits that they did not actually receive. It appears scammers filed false claims and received benefits using another individual’s name. If you receive an unemployment notice and you did not actually collect unemployment, you need to reach out to the Department of Labor to get it corrected. If you fail to get this corrected, IRS is going to be looking for that income to be reported on your tax return.
Tax Refunds:
Some taxpayers are seeing delayed refunds compared to previous years. Typically, refunds are issued in 10-14 days for direct deposit. We have seen some refunds be issued in that time frame and some taking 6 weeks or longer.
Having your refund deposited directly into your bank account is the fastest way to receive your refund. Refunds via check take longer to issue. With the current postal service delays, this could mean you wait even longer to receive your refund.
You can check on the status of your refunds with IRS and NYS on their websites. To check on your IRS refund, go to: https://www.irs.gov/refunds. To check on your NYS refund, go to: https://www.tax.ny.gov/pit/file/refund.htm. Most other states also have a way to check on refunds on their website.
You will need your 2020 tax return to answer the questions to verify your identity and refund amounts when you use these tools to check your refund status.
Your refund status on the website is normally available 48-72 hours after filing. It may be listed as pending or may provide a date of issuance. If it is pending, IRS indicates that you should wait at least 60 days from your filing date before contacting them regarding a refund. If it is listed as pending and you receive a letter in the mail regarding the return, you must respond to that letter before any refund will be issued.
If it reflects a date that a refund was issued, IRS indicates you need to wait at least 45 days after that date before notifying them that a refund was not received.
Stimulus Payments:
Still waiting for your 3rd stimulus payment? IRS has a Get My Payment tool on their website to see if the payment was sent to you and if it was sent via direct deposit or check/debit card. To check on your stimulus payment, go to: https://www.irs.gov/coronavirus/get-my-payment. This will only show you information for your 3rd payment. You will not be able to see information regarding your 1st or 2nd payment here.
If you did not receive your 1st or 2nd payment, you need either create an online account to trace your payment or you can call 1-800-919-9835. There is limited phone assistance, so be prepared for an extended wait time.
When you receive your 3rd payment, make sure to keep the documentation of how much you received. You will need this information to reconcile that payment as part of your 2021 tax return.
Paying Your Tax Bill:
If the tax return is done and there is a balance that you cannot pay in full, you should file the tax return without the full payment. The calculation of a late payment penalty and interest begins with the original due date of the return. For 2021, that means the calculation is going to start adding up on May 17th. Filing an extension is not going to change the calculation of the late payment penalty and interest, it only avoids a 2nd penalty of late filing.
Some individuals want to file an extension because they do not have the ability to pay the balance due on the tax return. We recommend that you go ahead and file the tax return without paying the full balance due. Pay as much as you can to reduce the late payment penalty and interest being charged. Your next step depends on how quickly you can pay the balance due in full.
For 4-6 weeks after filing the return, you will receive a notice from the governmental agency you owe money to regarding the outstanding balance due with penalties and interest added. Pay the balance on the notice when you receive it, and you will be done for the year.
When you receive the notice, you can consider sending in another partial payment. Send in another partial payment with the 1st notice received. When you receive the 2nd notice in another 4-6 weeks, pay the balance due at that time in full.
When you set up an installment agreement with IRS, there is an installment fee charge. By paying the balance quickly within one or two notices, you can avoid paying that charge. However, since you have not set up an installment agreement, the monthly percentage that you are charged for the penalty amount is higher. The saving on the installment fee charge is only going to be beneficial if you can pay the balance in full quickly and not pay that higher percentage for the penalty too long.
If you need more time to pay the balance due, you will want to set up an installment agreement. To set up an installment agreement with the IRS, you will be required to pay a one-time user fee of between $31 and $225, depending on how you set up the agreement. Refer to the instructions for Form 9465 for more information.
IRS charges a 5% penalty for the first month. Once an installment agreement is in place and you begin making the required payments, your penalty is calculated at ¼%. If you think you will need to go on an installment agreement, the earlier you set it up, the less penalties you will pay. A balance due with no installment agreement has a penalty of ½% each month after the first month.
You can set up the installment agreement when completing your tax return or wait for the first notice is received to set it up. An installment agreement generally allows you to pay the balance due over 60 months.
To quickly calculate what your required minimum payment will be, divide the amount due by 40. This is the approximate payment that would be required for 60 months. We use 40 months to calculate the minimum payment to account for the accrual of penalties and interest each month. The anticipation is you will be paying this amount for 60 months due to the accumulation of penalties and interest. You can agree to a higher payment to get the amount paid off quicker if you wish. The faster you pay it, the less the overall penalties and interest will be.
IRS will generally accept the installment agreement with no additional financial information if the total balance due is less than $50,000. The payment must pay the balance within five years and you must request the installment agreement online. If you do not meet these conditions, you may be required to provide additional financial information and the IRS will determine what your monthly payment amount will be.
You are only allowed to have only one installment agreement with IRS at a time. By setting up an installment agreement, you agree you will remain current on all future taxes. Be sure to correct any withholding issues, make required estimated tax payments, and keep current on all taxes while on the installment agreement.
Failure to maintain the installment agreement can result in garnishment of your wages, bank account levies, and/or tax liens.
Any refunds that result from future tax returns filed while there is an installment agreement in place will be kept and applied against the balance due. The three stimulus payments sent out during the last year were specifically exempt from being kept to pay any other balance due and you should have received those payments even while on an installment agreement.
Each state has its own regulations for an installment agreement. NYS will generally accept the installment agreement with no additional financial information if the amount due is less than $10,000. If you are setting up an installment agreement with NYS, there is no user fee. NYS is going to require the payment to automatically come out of a checking or savings account.
We hope you understand there has been a lot of chaos and delays in this year’s filing season. There is a lot of misinformation out there. We are still waiting on decisions or the ability to incorporate some of the changes to be able to file tax returns. If you have questions or concerns regarding how to pay your taxes or any of these changes, give Riverside Income Taxes a call.
