On Extension – Estimated Tax
Quick lesson on confusing and contradictory IRS lingo: Penalties are generally based on the amount unpaid taxes, which have not been paid by the due date. When IRS says “taxes owed” that more correctly means “taxes assessed” but sometimes it can mean “taxes assessed, but still unpaid” depending on the context of the discussion.
Recommended manner in paying Form 1040 estimated tax
Estimated tax payments are due April 15th, June 15th, September 15th and January 15th.
- IRS has a payment voucher to accompany the taxpayer’s check Form 1040-ES (IRS web page)
- Payments can be made online here: http://www.irs.gov/Payments/Direct-Pay
- An EFTPS account to make and track payments can be done online here: https://www.eftps.gov/eftps/
- And other methods, including credit cards here https://www.irs.gov/payments/ (note that there is a stiff processing fee when using a credit card)
For many taxpayers a superior method is to make their timely April 15th payment on an extension Form 4868 rather than use Form 1040-ES (or its electronic equivalent). For example, a taxpayer who needs to pay $40,000 for 2018 estimated tax, would use this schedule:
- April 15, 2018, with Form 4868 $10,000
- June 15, 2018, with Form 1040-ES $10,000
- September 15, 2018, with Form 1040-ES $10,000
- January 15, 2019, with Form 1040-ES $10,000
If the taxpayer may owe some additional tax for 2017, an appropriate amount would be added to the April 15, 2018 Form 4868 payment.
When the taxpayer eventually timely files Form 1040, a “credit elect” election is made (on Form 1040, line 21) to roll the excess to the following year’s estimated tax.
What if the taxpayer already filed for an extension? Generally there is nothing preventing the taxpayer from filing an additional paper-filed extension, nor many types of electronic filed extensions.
When making a payment on or before the due date, the IRC §7502 “timely mailed = timely filed” rule says that the USPS postmark determines timeliness. If the due date is missed, then the postmark no longer applies and the date of receipt and processing by the IRS prevails and determines when late payment interest-penalty is assessed. IRS assesses interest-penalty for a month at a time, as of the 15th of the month.
Note that pursuant to Regs. §301.7502-1(c) and §301.7502-1(e) the “timely mailed = timely filed” rule generally also only applies when there is a legible USPS postmark on the envelope that is delivered to and received by the IRS. Otherwise certified mail receipts obtained by the taxpayer might be used. Since the mail can get lost, it is up to the taxpayer to obtain and keep certified mail or registered mail receipts. Do not use private postage meter postage to rely on for the mailing date see, Regs. §301.7502-1(c)(1)(iii)(B). While certain approved private carrier services by FedEx and UPS sometime may be used, I generally suggest only using specifically: USPS certified mail, see Regs. §301.7502-1(c)(2). Special rules for electronic filing are covered by Regs. §301.7502-1(d).
Note that for timely filings and timely payments the IRC §7503 rule and Reg. §301.7503-1 holds when last day performance of an act falls on Saturday, Sunday, or legal holiday the act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday.
Note: for the definition of what constitutes “a month” see Regs. §301.6651-1(b).
See our page IRS Penalties – Late Filing & Late Payment for more related information.
Payments made after the following April 15th
Little understood trap #1: If by April 16th more than 10% of the prior year’s tax is unpaid (and remains unpaid until the late filed Form 1040 is filed)…
IRC §6651(a)(1) says that the late filing penalty is effective upon missing the due date of April 15th OR LATER as “determined with regard to any extension” which would normally be October 15th. For example, filing on December 14th means that the Form 1040 was filed 2 months late, and therefore the late filing penalty is 5% * 2 of 90% the tax that was not paid before the date prescribed for the payment of the tax, which was April 15th.
It is 90% rather than 100% of the tax unpaid as of April 16th because IRC §6651(c)(1) says that the late paying penalty comes first and that for any month where both the late filing and the late paying penalties are both assessed, the taxpayer will get a credit against the late filing penalty for the amount which is assessed for the late paying penalty.
Why April 15th? See IRC §6651(b)(1) which says “For purposes of subsection (a)(1), the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return”
The date prescribed for the payment of the tax is April 15th.
Summary, when a filing extension was granted, the late filing penalty months are counted starting on October 16th. The penalty itself is computed based on the amount of tax that was not paid before the date prescribed for payment of the tax, which is April 15th.
Little understood trap #2: For payments made 6 months late, on October 15th with the filing of the tax return, on extension.
IRC §7502(a)(2)(ii) says that the prescribed date for making a payment includes an extension granted for making the tax payment. A Form 4868 extension is for the filing of the tax return, but remember, that is not for the payment of the taxes due. An underpayment of less than 10% is generally considered okay (little or no penalties) pursuant to Treas. Reg. §301.6651-1(c)(3) and (4) and IRM 20.1.2.1.3.1(6), if it is paid as late as October 15th. But generally, mailing a tax payment on October 15th, does not stop the running on interest until the month period the check is received by the IRS, meaning one full additional month’s interest. This is because the IRC §7502 timely mailing = timely paying rule would not be applicable when the due date for the payment was April 15th and the Form 4868 extension did not extend that payment due date. Note: this is inconsistently applied by IRS and the interest may stop as of October 15th.
Little understood trap – anomaly #3: For requested credit elect payments that have been eliminated by IRS for prior year taxes, penalty and interest.
The current year penalty for underpayment or late payment of estimated tax is computed based on the amount of credit elect as reported by the taxpayer. If during processing of the Form 1040 the IRS eliminates the amount claimed as a credit elect, the estimated tax penalty is not always re-adjusted to reflect this. Conversely, if the taxpayer is aware that the credit elect was denied by the IRS and therefore it is not shown by the taxpayer on the Form 1040, then the estimated tax computation does reflect that, resulting in the computation of a higher penalty.
Late payments / late filings
Caution: pursuant to IRC §6511(b) payments of tax that go unclaimed or unused for two or three years can be forfeited to the U.S. Treasury as a penalty for non-filing or late filing. In other words, absent any extenuating circumstances, generally no credit elect and no refund will be allowed after two or three years.
A rare and little known procedure is outlined in Rev. Proc. 2005-18 and IRC §6603 which says that in lieu of payments of tax, deposits can be made to suspend the running of interest on potential underpayments, etc. This procedure is generally used by and maybe even limited to taxpayers who under IRS examination of disputed items.
Caution: using Form 4868 as outlined above generally only works for a period of weeks preceding April 16th. But sometimes taxpayers need to pay prior year taxes even later, after April 15th. A way to do this in lieu of filing Form 4868, is to late-file a 4th quarter 1040-ES for the prior year (which was normally due January 15th) Payment made online may also allow flexibility in this regard. See http://www.irs.gov/Payments/Direct-Pay