IRS Guidance Offers Relief and Confusion

Recent guidance from the IRS has granted additional relief to taxpayers impacted by California wildfires and created uncertainty for the implementation of one of President Trump’s August 8th Executive Actions.

Filing and Payment Relief for California Wildfire Victims

On August 26, the IRS issued Notice CA 2020-06 providing relief to taxpayers affected by the August wildfires. Relief includes extending tax filing due dates and payment dates to December 15, 2020. The Franchise Tax Board granted similar tax filing relief on August 28.

  • Individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; annual information returns of tax-exempt organizations; and employment and certain excise tax returns, that have either an original or extended due date occurring on or after August 14, 2020, and before December 15, 2020 are extended to December 15. Note: Any balances owed with the filing of these returns will not be subject to relief if the tax should have been timely paid prior to August 14.
  • Affected taxpayers that have an estimated income tax payment originally due on or after August 14, 2020, and before December 15, 2020, will not be subject to penalties for failure to pay estimated tax installments as long as such payments are paid on or before December 15, 2020. Under this relief Quarter 3 estimated tax payments normally due September 15 can now be paid December 15.
  • Time-sensitive acts listed in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2018-58, 2018-50 IRB 990 (December 10, 2018), that are due to be performed on or after August 14, 2020, and before December 15, 2020.
  • The filing of Form 5500 series returns that were required to be filed on or after August 14, 2020, and before December 15, 2020
  • Payroll and excise tax deposits due between August 14 and August 31 will not be subject to late payment penalties/interest if paid no later than August 31.

Taxpayers located in counties designated by FEMA as “qualifying for assistance” will be granted the relief discussed above. Currently, this includes:

  • Lake
  • Monterey
  • Napa
  • San Mateo
  • Santa Cruz
  • Solano
  • Sonoma
  • Yolo

Additional counties may later be added as determined by FEMA.

Relief is automatic for businesses located in or taxpayers living in the above counties. If a taxpayer/business located elsewhere is impacted because their books and records are located within a county listed above the taxpayer should contact the IRS (866-562-5227) to request relief.

Related Tax Relief:

  • Employers wanting to assist impacted employees can provide their employees with “Disaster Relief Payments”. These payments are deductible business expenses of the employer and tax free to the employee if made to “pay reasonable and necessary personal, family or living expenses incurred as a result of a disaster”. This can include medical and housing expenses. Please see, COVID-19 and Tax Changes: Employer Aid to Employees, for additional information.
  • Taxpayers with deductible disaster losses can claim these losses on either their 2020 tax returns when filed in 2021 or on their originally filed or amended 2019 returns. Claiming on a 2019 return will result in a more immediate cash benefit.

Confusion Surrounds President’s Payroll Tax Deferral Order

On August 8, President Trump signed an executive memorandum delaying the withholding, deposit, and payment of employee Social Security tax effective September 1 to the end of 2020. This deferral applies to employees earning less than $4,000 per bi-weekly pay period, or approximately an annual salary of $104,000.

The tax is simply deferred not waived. President Trump has indicated he would seek to forgive the deferred tax if he’s re-elected, but this will require Congressional approval. Since this will reduce the funding source for Social Security the proposal does not have widespread support in Congress.

The President’s memorandum was lacking details and directed the Treasury Secretary to implement this program. On August 28, the IRS released Notice 2020-65 providing needed guidance but leaving unanswered questions.

The guidance provides for the following:

  • Employees are eligible for the deferral only if the amount of their wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.
  • The determination of eligibility is made on a pay period-by-pay period basis.
  • The tax deferred is payable ratably by deducting from wages and compensation paid during the period Jan 1, 2021 to April 30, 2021. Employer deposits of deferred tax paid after April 30th will be subject to late payment penalties and interest.
    • Employees will have “extra” Social Security tax deducted from their 2021 wages to pay the tax that was deferred in 2020 resulting in lower net pay.
  • Employers may “make arrangements to otherwise collect” the total tax owed from the employee.

Employees benefit from a short term loan as the “loan” must be repaid by April 30, 2021. However, the employer remains liable for the payment of any tax deferred by its employees.

It remains unclear:

  • If the deferral is mandatory or elective and if elective does the employer, employee, or both make the election. The notice grants withholding relief to the employer and Treasury Secretary Mnuchin has indicated that he can’t force employers to stop withholding. The deferral is granted under the Treasury Department’s authority to delay tax filing and payments due to a designated disaster. Complying with such an extension is generally at the taxpayer’s option.
  • How the deferred tax will be collected from terminated employees or employees with reduced compensation in 2021 during the repayment period.
  • How the deferred tax would be paid if an employer ceases business before remitted all deferred taxes.
  • The CARES Act allowed self-employed taxpayers to defer the payment of the employer portion of social security tax. It appears the partial deferral of the employee portion is not available to the self-employed.

We will continue to monitor and provide updates if additional guidance is released. In the meantime, please contact our COVID-19 Resource Team for additional guidance.