April 13, 2021
IRS clarifies application of individuals' 2020 overpayments to 2021 estimated taxes
On April 12, 2021, the IRS announced details of how individual taxpayers' 2020 overpayments can be applied to their 2021 estimated tax by giving three detailed examples.
The IRS automatically extended from April 15, 2021 until May 17, 2021, the time for individuals to file federal income tax returns in the Form 1040 series and make federal income tax payments in connection with those forms (see Tax Alert 2021-21). The postponement does not apply to 2021 estimated tax payments due on April 15, 2021, which are still due on that date.
In a recent announcement, the IRS said that, while individuals could credit 2020 overpayments against their 2021 estimated tax, the timeliness of those payments for estimated tax purposes would depend on when the overpayment arose. Overpayments for 2020 that exist as of April 15, 2021 (because payments made on or before April 15, 2021, exceed the 2020 tax liability) will be applied as of April 15, 2021, whether the 2020 return is filed on April 15, May 17, or October 15, 2021.
Overpayments for 2020 that are attributable to a payment made after April 15, 2021 (including any payment made after April 15, 2021, but on or before May 17, 2021), will be credited as of the date the payment is received, thus making them untimely for first quarter estimated tax purposes.
Taxpayers and tax professionals alike had been asking the IRS to clarify this point since the extension to May 17, 2021, was announced on March 17, 2021. In early April, an unnamed "IRS spokesperson" told Tax Notes that "a taxpayer who has an overpayment on a timely filed 2020 return that satisfies its 2020 obligation and is sufficient to cover the first-quarter 2021 estimated payment shouldn't expect to incur interest or penalties."1 The recent IRS announcement seems to contradict that statement, causing further confusion among taxpayers just days before the April 15, 2021 first quarter estimated tax payment deadline.
1 Kelley R. Taylor, Filing Delay Spurs Questions on Overpayments, Gift Tax Returns, Tax Notes (Apr. 2, 2021).