IRS Seen as Unfairly Excluding Those Who Pay Own Taxes

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Critics of the IRS’s decision not to more uniformly extend tax deadlines are rebuffing IRS suggestions that people who pay their own taxes are often higher-income individuals looking to profit from delaying their payments.

Key Takeaways

  • The IRS is drawing fire after it extended the deadline for filing 2020 individual tax returns from April 15 to May 17, but said those who pay their own taxes with quarterly estimates will still have to make first-quarter payments by April 15.
  • The IRS said it didn’t give people who pay their own taxes the extra time because many are wealthy people looking to profit from delaying their payments.
  • Critics have pushed back, arguing that many of these taxpayers are small business owners who are not wealthy.

The IRS recently postponed the deadline for filing 2020 individual tax returns to May 17 from the traditional April 15 date, but the extension doesn’t apply to the estimated payments people make quarterly when they haven’t had their income taxes withheld by their employer or otherwise. Estimated payments for the first quarter are still due on April 15, the IRS said, even though the tax return used to determine that estimate can technically be filed a month later.

Why? IRS Commissioner Charles Rettig told a House subcommittee March 18 that the decision was about where to “draw the line,” and that not extending the deadline for estimated tax payments was aimed at avoiding letting wealthy people “game the system.” Specifically, Rettig said, many wealthy individuals fail to make their estimated quarterly payments, opting instead to invest the money, and the IRS doesn’t want to encourage that by giving them a break on the penalties they would owe.

Tax Preparers and Accountants Cry Foul

The decision—and the justification—drew immediate pushback from legislators and accounting and tax preparer groups who argued that many who pay estimated taxes, including small business owners, are not wealthy and are being disadvantaged. They point out that millions of people who pay estimated taxes won’t even be able to take advantage of the extended deadline because, to calculate their initial estimated payment, they rely on their 2020 filing.

“As a former realtor, an independent contractor coming out of college, I was not a high-income earner, but I paid quarterly taxes, I paid quarterly estimates,” Michigan House Rep. Bill Huizenga told Treasury Secretary Janet Yellen during a House Financial Services Committee hearing March 23 where she called estimated taxpayers “mainly high-income” when the same issue came up. “There are all kinds of people like that who are small business owners."

Neither Yellen nor Rettig provided any evidence at the time that most estimated taxpayers have high incomes, and spokespeople for both the Treasury Department and the IRS did not provide any clarification.

People who make estimated payments may be in business for themselves and are generally expecting to owe at least $1,000 when they file their returns, according to the IRS. About 9.65 million people filed estimated taxes in 2018, IRS data shows.

The IRS said it extended the individual filing deadline to May 17 because of the unusual circumstances and burdens created by the COVID-19 pandemic. For its part, tax code changes like a tax break for unemployment benefits received in 2020—enacted after many people had already filed their returns—adds more work for the agency, which has said it plans to issue automatic refunds.

Longer Extension?

Citing backlogs at the IRS, groups including the National Conference of CPA Practitioners (NCCPAP) and the American Institute of CPAs (AICPA) are pushing not only for uniformity in the deadlines, but for an even longer extension to June 15 for all returns and payments.

“The inconsistency of filing deadlines is causing confusion and hardship for countless taxpayers. Many individual filers are also small business owners whose goal is not to ‘game the system’, but rather to survive through uncertain times,” said Scott Artman, executive director at the National Association of Tax Professionals, in a statement circulated by the AICPA.

The IRS delayed deadlines a year ago too—during the onset of the pandemic—and that time the agency did include estimated tax payments that were due on April 15 in the extension, which was until July 15 that year. 

Critics of the IRS decision this year argue the mismatched delays don’t do anything for estimated taxpayers since they will have to file by April 15 anyway in order to know what to pay. Most estimated taxpayers actually fall into the lower and middle-classes, according to the NCCPAP. 

“We have a lot of folks that need to understand what their tax liability is before they are going out and sometimes having to borrow cash to make that first estimated payment, especially those in seasonal work, such as construction, landscaping, those kinds of things,” Huizenga said at the House committee hearing with Yellen.

Even so, Rettig was adamant at the March 18 hearing that the deadlines remain where they are. He said penalties for missing estimated payments are low, and that estimated tax payers should reach out to the IRS if they have issues with the deadlines.

“There’s a large contingent of wealthy individuals in this country who do not make their estimated payments and who essentially take the money that should be being paid in on a quarterly basis to the government and take the arbitrage and they invest it,” he said. “And we’re not going to give them a break of interest in penalties to do so.” 

Rettig said, “We had to draw a line, and we drew the line on the most vulnerable individuals.”