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The IRS has announced (Notice 2021-08) that it will waive the addition to tax under IRC Section 6654 for an individual taxpayer's underpayment of estimated tax if the underpayment is attributable to changes the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) made to IRC Section 461(l)(1)(B).

The waiver is available to any qualifying estate or trust that is treated as an individual for purposes of IRC Section 6654 and is required under IRC Section 6654 to make estimated tax payments on its income. However, the waiver is not automatic and applies only for estimated income tax installments due on or before July 15, 2020, for a tax year that began in 2019.

Background

Taxpayers whose federal income taxes are not withheld from their wages or other income typically must make quarterly estimated tax payments. Taxpayers failing to timely make required quarterly estimated tax payments may face liability for an addition to tax under IRC Section 6654(a).

Certain exceptions apply to the imposition of an addition to tax under IRC Section 6654. For example, no addition to tax will be imposed:

• On an individual taxpayer who owes less than $1,000 in tax after subtracting tax withheld on wages (IRC Section 6654(e)(1))
• If the individual is a US citizen or resident and did not have any tax liability for the prior 12-month tax year (IRC Section 6654(e)(2))
• On any underpayment if the Treasury Secretary determines that imposing the addition to tax "would be against equity and good conscience" (IRC Section 6654(e)(3))

Added to the code by the Tax Cuts and Jobs Act (TCJA), IRC Section 461(l)(1)(B) disallows any deduction for an excess business loss (EBL), which is generally defined as the excess of (1) the aggregate deductions for the tax year attributable to a non-corporate taxpayer's trades or businesses over (2) the sum of (a) the aggregate gross income attributable to the taxpayer's trades or businesses for the tax year and (b) $250,000 ($500,000 if filing jointly), subject to inflation after 2018. Disallowed EBLs are treated as net operating losses (NOLs) for the tax year for purposes of determining the IRC Section 172(b) NOL carryover for subsequent tax years (IRC Section 461(l)(2)).

CARES Act changes to IRC Section 461(l)(1)(B)

The deduction disallowance in IRC Section 461(l)(1)(B) originally applied to any tax year beginning after December 31, 2017 and before January 1, 2026. The CARES Act modified the code to make the disallowance applicable for tax years beginning after December 31, 2020 and before January 1, 2026.

Notice 2021-08 points out that an individual taxpayer might have underpaid an estimated tax installment for a tax year that began in 2019 if the taxpayer had expected to have a lower annual payment after utilizing an NOL carryover that was available before the CARES Act modified IRC Section 461(l)(1)(B). This underpayment could cause the taxpayer to be liable for an addition to tax, assuming the taxpayer does not qualify for an exception under IRC Section 6654(e)(2).

Due to changes the CARES Act made to IRC Section 172(b), NOLs arising in tax years that began after December 31, 2017 and before January 1, 2021 may be carried back five years. Nonetheless, taxpayers may elect (IRC Section 172(b)(3)) to not carry back their NOLs. Those who did not make this election might have underpaid one or more of their estimated income tax installments beginning in 2019, Notice 2021-08 explains.

The notice distinguishes the effect of the CARES Act amendments to IRC Section 461(l)(1)(B) and IRC Section 172(b), pointing out that "an individual taxpayer cannot make an election to opt out of the effect of the CARES Act amendment to [IRC Section] 461(l)(1)(B)."

Equity and good conscience. Having considered this potential situation, Treasury and the IRS "have determined that it would be against equity and good conscience to impose an addition to tax under [IRC Section] 6654 for certain underpayments of estimated income tax resulting from changes made by the CARES Act to [IRC Section] 461(l)(1)(B)," the notice states.

Limited waiver. Notice 2021-08 waives a portion of the addition to tax under IRC Section 6654 that is attributable to changes the CARES Act made to IRC Section 461(l)(1)(B) for individual taxpayers' estimated tax installments due on or before July 15, 2020, for a tax year that began in 2019.

To qualify for the waiver, an individual taxpayer must:

• Have a 12-month tax year for the tax year that began in 2019
• Have timely filed an original income tax return for the tax year that began in 2018 and reported an EBL on Form 461, Limitation on Business Losses
• Submit a qualifying waiver request, including by
• Timely filing an original income tax return that correctly accounts for the CARES Act amendment to IRC Section 461(l)(1)(B) for the affected tax year that began in 2019
• Completing the 2019 version of Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, or Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen

Calculating the waiver. In requesting a waiver, the taxpayer will need to calculate the amount of requested relief in order to complete lines 1 through 3 of Form 2010 or lines 1 through 5 of Form 2210-F. For these purposes, "revised amount of taxable income" means the individual taxpayer's taxable income reported on the original income tax return for the tax year that began in 2019 minus the "taxable income reduction amount."

To calculate the required annual payment and installment payments, an individual taxpayer must use the resulting current year tax (Form 2210, line 4; Form 2210-F, line 6) to compute the required annual payment and installment payments due on or before July 15, 2020. If the taxpayer is using the annualized income installment method (IRC Section 6654(d)(2)), the amount in each column of line 13 on Form 2210, Schedule AI, Annualized Income Installment Method, must be reduced by the taxable income reduction amount if the particular column relates to an installment due on or before July 15, 2020.

The taxable income reduction amount is generally defined as the lesser of:

• The amount by which the EBL would have reduced the pre-CARES Act taxable income if the 2018 EBL were not disallowed
• 80% of the taxable income that would have been determined for the tax year that began in 2019 if the CARES Act had not been enacted, computed without regard to the IRC Section 172 deduction

The taxpayer must write "Notice 2021-8" on the top of Form 2210 or 2210-F and attach:

• Form 461 filed with the timely filed original income tax return for the tax year that began in 2018
• Any Form 461 filed with the most recently amended income tax return filed before March 27, 2020, for the tax year that began in 2018
• A statement explaining how the taxpayer determined the taxable income reduction amount

The Form 2210 or 2210-F must be submitted with either an original or amended tax return for the tax year that began in 2019. If the original tax return has already been filed and the IRC Section 6654 addition to tax for which relief is being granted has already been paid, the taxpayer must include Form 2210 or 2210-F with a Form 843, Claim for Refund and Request for Abatement.

Implications

The notice is welcome relief for taxpayers that underpaid on their 2019 returns because they were expecting an NOL to be available to them that was taken away by the CARES Act. The key to getting relief requires taxpayers to take affirmative action — either by amending the 2019 return or requesting the penalty to be removed on Form 843. The Service is not going to do the recalculations itself and start issuing refunds.

Taxpayers must consider whether the time and effort necessary to do one of these required acts is worth the penalty refund because the relief only covers the first two installments of estimated tax. In some cases, it will be; in others, it will not.

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