Taxpayers need to plan for possible balloon payments resulting from delayed due dates as part of the government’s attempts to address the coronavirus pandemic, according to practitioners.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), signed into law March 27, features several relief provisions that allow taxpayers to delay payment of some taxes — for instance, employers can defer their share of 2020 payroll taxes until 2021 and 2022, and income tax returns, with payment, aren’t due until July 15.
While the payment deferrals can provide taxpayers with welcome financial flexibility, taxpayers risk kicking down the road a debt they might be unable to pay when it comes due, Sara V. Spodick, director of the tax clinic at Quinnipiac University School of Law, said April 7 on a webcast sponsored by the Federal Bar Association and myLawCLE.com.
These balloon payments, particularly for the employment tax delay, could mean taxpayers will have to pay two years’ worth of taxes when the deferral runs out — the deferred 2020 taxes and the normally due 2021 taxes, Spodick said. Businesses considering taking advantage of the delay provisions need to keep the size of the eventual payment in mind, she added.
“This is a dangerous proposition for companies that did not have great financial stability before the COVID virus,” Noelle Geiger of Green & Sklarz LLC said. The short-term deferral may not save a struggling business as a going concern and merely prolongs the inevitable, she said.
“Taxpayers should just be careful and be wary about the impact and what will happen if they defer [the tax] and can’t later pay,” particularly the payroll taxes, Geiger said. She pointed to the section 6672 trust fund recovery penalty that can impose a business’s unpaid payroll tax liability on a responsible person, including owners and bookkeepers with check-writing authority.
Geiger noted that the CARES Act relieves the latter group of responsible persons from the penalty when following orders from the owners to take advantage of the payroll tax deferral. However, if the bookkeeper is the main proprietor’s spouse and a co-owner, the exception won’t apply, she said.
Spodick said that instructions from a superior normally don’t insulate someone from an otherwise applicable trust fund recovery penalty and that the IRS could infer that a less-involved spouse knew about the business’s struggles when considering where to aim collection efforts.
Geiger cautioned taxpayers considering the payroll loan option to also consider possible payment options should they fail to satisfy the forgiveness requirements.
Regarding the income tax payment delay, Geiger recommended that taxpayers able to pay immediately should do so. A taxpayer considering taking advantage of the delay should have a plan for paying the taxes when they become due, she said. Some taxpayers may be good candidates if they are expecting a significant new contract or if they are furloughed employees expecting to return to their jobs in a month or two, she added.
Spodick cautioned against taxpayers anticipating potential bankruptcy protection as part of any deferral considerations. Income taxes generally aren’t dischargeable until three years have passed, she said. Geiger added that payroll taxes aren’t dischargeable at all.
Coronavirus, Taxes, Divorce, Oh My!
Spodick and Geiger also discussed the possible interactions between another CARES Act relief provision — the renewed allowance of net operating loss carrybacks under section 172 — and taxpayers going through divorce.
Spodick gave the example of two taxpayers with a divorce finalized in January 2020 in which one of the taxpayers seeks to carry a loss generated by the economic downturn to an earlier tax year.
Geiger said that if the taxpayer seeking the carryback is looking for the immediate cash tax refund as part of weathering the pandemic, the other taxpayer should enlist an independent accountant to review the amended return with the carryback, and may need to return to the divorce attorney to ensure equitable apportionment of the refund.
The acrimony of some divorces may also be a problem in these situations if the other spouse refuses to sign the amended return, Geiger said. “There might be a very viable refund opportunity, but because they hate each other so much, they’re letting this go,” she said, adding that taxpayers should carefully document uncooperative behavior in case a court becomes involved in the dispute.
Aidan R. Welsh of Schoonmaker, George, Colin, Blomberg, Bryniczka & Welsh PC pointed out that the relief provisions in the CARES Act and the IRS’s reduced collection efforts under the People First Initiative could come up in family court. If a former spouse obliged to pay support, alimony, or child support to the other falls behind because of the pandemic, there may be a contempt proceeding, she said.
Some family court judges already consider federal tax liabilities the second priority behind those support obligations, Welsh said. Additional options to delay tax payments will likely come up if the payer spouse chooses to pay taxes before spousal or child support, she said.