The key is the overpayment must have existed as of April 15, not created in anticipation of the delayed filing date of May 17, 2021.

As we reported in our previous Alert, the IRS postponed the date to file 2020 individual tax returns, but not first quarter 2021 estimated tax payments, which remain due by April 15, 2021. On April 13, with little time to spare, the IRS announced that if an individual taxpayer has a 2020 overpayment and elects to credit it against the 2021 estimated tax, the date on which the 2020 overpayment is applied against the 2021 estimated tax depends on two factors: (a) the date(s) of payment and (b) the extent to which an overpayment exists as of April 15, 2021. A timely filed extension request has no effect on the date of payment or the date on which an overpayment exists.

The IRS stated that to the extent an overpayment of the 2020 tax exists as of April 15, 2021, and the taxpayer makes a valid election to apply the overpayment to 2021 estimated tax, the overpayment would be applied as of April 15, 2021, regardless of whether the 2020 return is filed by April 15, May 17 or October 15, 2021. The key is the overpayment must have existed as of April 15, not created in anticipation of the delayed filing date of May 17, 2021, as described below.

Further, according to the IRS, to the extent an overpayment of the 2020 tax is attributable to a payment made after April 15, 2021, but on or before May 17, 2021, that overpayment would not be available for crediting as of April 15, 2021, and would be applied as of the payment received date, not as of April 15, 2021. This implies the imposition of penalties for late first quarter 2021 estimated tax payments if the taxpayer’s intent was to apply the overpayment to the first quarter of 2021, but the overpayment was created after April 15, 2021 (e.g., by way of the May 17 extension payment). Following are a few illustrations provided by the IRS on the operation of this newly issued announcement:

Example 1: Assume that an individual taxpayer: (a) owes $40,000 in income tax for 2020; (b) made no payments toward that tax by April 15, 2021; (c) owes $10,000 for the first estimated tax installment for 2021 due on April 15, 2021; and (d) paid $50,000 toward the 2020 tax on May 17, 2021. As a result, the taxpayer has a $10,000 overpayment for 2020. Because the payment was not made by April 15, 2021, no overpayment existed as of April 15, 2021 and the overpayment would not be available for crediting on April 15, 2021. Instead, the overpayment would be credited against the 2021 estimated tax installment as of May 17, 2021, the date of payment. The taxpayer's $50,000 payment on May 17, 2021, exceeded the taxpayer's liabilities and the $10,000 overpayment is available for crediting. This is the case even if the $50,000 payment made on May 17, 2021, was paid with an application to automatically extend the due date to file the 2020 return to October 15, 2021. An extension of time to file has no effect on the date of payment or the date on which an overpayment exists.

Example 2: Assume that an individual taxpayer: (a) owes $40,000 in income tax for 2020; (b) prepaid $40,000 during 2020; (c) owes $10,000 for the first estimated tax installment for 2021 due on April 15, 2021; and (d) paid $10,000 toward the 2020 tax on May 17, 2021. As a result, the taxpayer has a $10,000 overpayment for 2020. Because the taxpayer's payments as of April 15, 2021, did not exceed the taxpayer's liability, no overpayment exists as of that date. Therefore, the overpayment is not available for crediting on April 15, 2021. The taxpayer's $10,000 payment on May 17, 2021, exceeded the taxpayer's liabilities and became overpaid. It is also the date the $10,000 overpayment is available for crediting, even if the $10,000 payment made on May 17, 2021, was paid in conjunction with an application to automatically extend the due date to file the 2020 return to October 15, 2021. An extension of time to file has no effect on the date of payment or the date on which an overpayment exists.

Example 3: Assume that an individual taxpayer: (a) owes $40,000 in income tax for 2020; (b) prepaid $45,000 during 2020; (c) owes $10,000 for the first estimated tax installment for 2021 due on April 15, 2021; and (d) paid $5,000 toward the 2020 tax on May 17, 2021. As a result, the taxpayer has a $10,000 overpayment for 2020. Because the taxpayer's payments as of April 15, 2021, exceeded the taxpayer's liability by $5,000, an overpayment of $5,000 existed on that date. The overpayment is applied against the first 2021 estimated tax installment as of April 15, 2021. The remaining $5,000 of the $10,000 overpayment is attributable to the payment made on May 17, 2021, which is when this amount would be credited against the first 2021 estimated tax installment, even if the $5,000 payment was paid with an application to automatically extend the due date to file the 2020 return to October 15, 2021. An extension of time to file has no effect on the date of payment or the date on which an overpayment exists.

TAG’s Perspective

We suspected the noted treatment and managed our clients’ prepared and reviewed returns in anticipation of this IRS interpretation. So, no fire drill here for our clients. We do not yet know the extent of potential IRS enforcement of penalties and interest or leniency in this regard. Time will tell. We continue to encourage clients to submit their tax material to us promptly in order to file sooner rather than later, despite the automatic May 17 extended due date, to secure refunds, to implement last minute 2020 tax saving strategies, to timely project 2020 and first (still due April 15) and second quarter 2021 tax obligations, to assist with cash flow management and planning, and now to ensure proper application of the new overpayment rules.

For More Information

If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, Steven M. Packer, any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.