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Filing Delay Spurs Questions on Overpayments, Gift Tax Returns

Posted on Apr. 2, 2021

Tax professionals are pondering what to do with the gift tax returns and the application of 2020 overpayments in light of the IRS extension of the income tax return filing deadline from April 15 to May 17.

“Those two are the final outstanding issues we are still waiting for clarification on from the IRS,” said Melanie Lauridsen, senior manager for tax policy and advocacy at the American Institute of CPAs.

In March the announcement (IR 2021-67) postponing the due date for federal income tax returns to May 17 came as welcome relief to many who have been adversely affected by the COVID-19 pandemic. But that relief (detailed in Notice 2021-21) didn't extend due dates for estimated tax payments or tax forms other than Forms 1040, as the IRS did last year during the height of the pandemic.

As a result, and with April 15 quickly approaching, there is a notable lack of certainty on technical questions that affect taxpayers who need to properly extend a gift tax return.

And taxpayers who planned to have their 2020 overpayments applied to first-quarter 2021 estimated payment obligations are left wondering when those payments will be applied.

“These procedural questions are important,” said Nate Smith of CBIZ Mayer Hoffman McCann PC. “It makes all the difference whether someone will potentially have an underpayment penalty or a penalty for not properly extending their gift tax return.”

Estimated Payment Obligations

Generally, “overpayments occur on the original due date of the income tax return, and payments that occur after the estimated payment due date do not benefit that quarter’s obligation,” Smith said.

In a typical year, that doesn't create confusion because the first-quarter payment and the income tax return are due on the same date. The IRS applies an overpayment to the next year’s first-quarter tax return estimated payment, so it is all considered timely paid.

This year, however, because the payment due date for 2020 has been extended to May 17, while the first-quarter estimated payment is still due on April 15, timing and clarity are paramount.

If the IRS doesn't align the due dates like it did last year, “the question becomes when will the payment be applied, and will a penalty or interest be applied?” Lauridsen said.

Unfortunately, until the IRS provides guidance, practitioners can't say for sure that taxpayers should roll their first-quarter 2021 payment into the 2020 income tax extension payment.

“They need to know for certain that the IRS will apply the payment back to April 15,” Lauridsen said.

Without any assurance, taxpayers might opt to make their payments by April 15 — an approach that, given the current date, leaves little room for indecision.

An 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. That taxpayer would also have to elect on the 2020 return to apply a refund to quarterly estimated tax payments.

As for the gift tax returns, typically forms 4868 and 8892 can be used to extend filing, which is usually associated with an extension of the income tax return. Failing to file a gift return on time can subject a taxpayer to gift tax penalties and, in some cases, additional minimum tax.

But this year, because Notice 2021-21 didn't extend the due date for 2020 gift tax returns, questions abound regarding how to effect a valid extension for the gift tax return.

“It gets very technical — you need a valid 1040 extension to apply to the gift tax return, and [you] need to do a calculation to have that extension be valid,” Lauridsen said. “That is where we are asking the IRS for clarification and guidance.”

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