Estimated Tax Payments - Don’t Sweat The Small Stuff

The decision by the IRS to extend the initial filing due date of individual tax returns to May 17 was mostly a good thing. Maybe not as good a thing as the extension to July 15 in 2020, but it was something. There was a wrinkle though. Unlike in 2020 the due date of first quarter estimated tax payments was not changed. That remains April 15. Thinking about how tax season would go back in the day, it felt like there wasn't that much of a shift.

First quarter estimates, all four quarters actually go with completed returns like coffee goes with breakfast. Actually coffee went with anything back in the day, but you know what I mean. On extended returns we would figure the first quarter estimate and include it with the extension amount with the idea that the refund would be applied. I started puzzling about how that was going to work with the due date moved to May 17. Will 2021 applied refunds be deemed to have been made on May 17?

It turns out that many in the tax preparer community are adopting a commonsense solution. And that would be to just not worry about it. We can call this the collective wisdom of #TaxTwitter.

#TaxTwitter help me out. If a client owes a 1st qtr estimate & waits to pay on 5/17 with extension, at an underpayment rate of 3%, the maximum penalty will be .0025 of the amount? So a $10k estimate costs $25 in penalty? Would cost more than that for me to figure it on 4/17!

— Jan Lewis (@janlewiscpa) March 23, 2021

The underpayment rate is the short-term federal rate plus 3% rounded to the nearest percentage. The short-term AFR is currently 0.12% or you might say 0% if you are rounding it off. The penalty was much nastier in the eighties, because money earned interest back then. And being a penalty, it was not deductible unlike interest. Of course nowadays much interest is not deductible.

What Is In A Name?

Old habits die hard. I had the insight about not getting real excited about estimated tax payments so much quite a few years ago. I was called up short by one of my partners, because he believed that a client looking at their return and seeing a "penalty" would be very upset. Being charged interest is one thing. That's just economics. But a penalty means that you have been bad.

At any rate Jan's analysis is quite sound. I even know one accountant who indicated they are not going to miss a beat getting things done through May 17 and they'll pay the small penalties that are created if the clients complain.

Why Does IRS Care So Much?

The reason that Commissioner Rettig gave for not extending the deadline is essentially "bad billionaires" or maybe multi-millionaires as Stephen Cooper notes in this article on Law360.