Taxable Talk

Almost everyone in California has an extension for filing and paying their taxes until October 16th (a result of the flooding in the state in January).  The IRS certainly know about this: they issued multiple announcements on the extensions.  Thus, a California taxpayer could file his or her return today and pay in October without any late payment penalties, late filing penalties, or interest (from April 15th onward).  This is absolutely, positively correct.

But.

Yes, there’s a but.  The wonderful IRS computer is sending out balance due notices to California clients (including one of ours).  John Smith (not his real name) owes the IRS about $30,000 for his 2022 tax (the return was filed in mid-May); he’s already set up a payment on IRS Direct Pay for October 16th.  Earlier this week he received a CP14 notice showing his balance due with penalties and interest.  This caused him to call me, where I confirmed that he didn’t have to pay the IRS until October and that the IRS notice was erroneous, and:

• Mr. Smith previously called the normal IRS telephone line (800-829-1040), and the agent he spoke to wasn’t aware of the extension for Californians and told him that he did need to pay now or penalties or interest would be charged.  He also waited on hold for over two hours before speaking with someone;
• I called the Practitioner Priority Service and discovered that (a) calls regarding these notices are heavy, (b) the IRS is apparently looking at stopping sending out the CP14 notices to Californians, and (c) yes, almost everyone in California doesn’t have to pay until October 16th.

The agent I worked with did put a freeze on notices to Mr. Smith, so his situation should be fine.  (It’s possible he’ll receive another notice in early October, but given his payment will be made in mid-October that’s not a big deal.)  But this is a result of not thinking things through completely.  These notices should never have been sent.  California’s Franchise Tax Board (California’s state tax agency) did not send Mr. Smith a notice regarding his California balance due (about $5,000).  That payment, too, is scheduled to be made on October 16th.  It shouldn’t have been a big deal for the IRS to correctly program its computers.

Of course, the IRS is dealing with technology that’s older than I am.  Yes, the main IRS computer system dates back to 1959.  Think punch cards and a computer that takes up a huge room.  (An aside: Are you a COBOL programmer?  If you are, the IRS wants to hire you!)  Making programming changes is very difficult.  The money going to the IRS to upgrade technology is really needed.  (Yes, there’s no guarantee that it will be spent wisely but the IRS definitely needs to update its computer systems.)

If you are a California resident and receive a CP14 notice, let your tax professional know.  At this point, it may be that a call to the IRS is necessary (unfortunately), but you really don’t have to pay until October 16th (unless you live in one of the three California counties that weren’t extended).

Back in January, severe winter storms impacted California.  Much of the state was declared a federal disaster area; these declarations are always county-by-county.  As of today, only two counties in California (both in the northeastern corner of the state) are not federal disaster zones.  The IRS rightly extended tax filing deadlines from April 18th to May 15th.

But on February 24th the IRS announced that they were again extending California deadlines from May to October.  Why was this done?  The announcement doesn’t specify a reason, and almost all other disaster zones didn’t get this treatment.  For example, victims of the horrific tornadoes in Mississippi are looking at a July 31st deadline.  Indeed, Broward County (Florida) was just declared a federal disaster zone due to massive flooding in April; their tax deadline was extended only to August 15th.  I have a theory, and it has nothing to do with taxes and everything to do with politics.

President Biden recently formally announced he’s running for reelection.  (It’s been clear for a while he’s running.)  One of his biggest rivals in the Democratic Party is California Governor Gavin Newsom.  Governor Newsom recently toured other states and gave the impression (at least, to me) that he’s considering running for President.  Meanwhile, California faces a budget crisis–there’s at least a $22.5 billion deficit.  And that figure likely understates the problem: the tech industry is not doing well, and that (a) drives personal income tax collections in California (the top 1% of taxpayers pay about half the state’s personal income tax, and many of that 1% are technology industry executives) and (b) personal income tax collections make up about two-thirds of California tax collections.

Suppose you were running for reelection and you wanted to make sure a rival couldn’t run against you.  A budget crisis right at the time the rival would be announcing his candidacy would sure hurt him.  California was forced in January to extend its own deadlines for tax filing to May (state law mandates conformity to federal disaster extensions).  Delaying payments five more months would cause problems to California’s finances–and given the current state of the tech industry might kneecap a rival from running.  (When the IRS extended the deadline to October, California did conform.)  All good political reasons for delaying the deadline another five months.  Of course, the IRS is supposed to be an apolitical organization; however, one thing I’ve learned from the Lois Lerner scandal is that most political appointees within the IRS absolutely, positively look at the political spin on almost everything they do.

Now, I have no proof of what I’ve written.  It’s a theory (some might even call it a conspiracy theory).  It does, though, conform to the facts of the situation and there’s no evidence that I can find to refute my theory.  I hope I’m wrong about it, but like investigators looking at a troubling situation I suspect I’m correct.

You know what today is, right?  Yes, the Ides of March–and the US tax filing deadline for partnerships and S-Corporations.  If your entity isn’t ready to file, download Form 7004 (the extension request) and mail it using certified mail today.  The deadline is a postmark deadline so it doesn’t matter when your extension is received–but you need to maintain proof of filing.  Better yet, efile your extension and you don’t have to stand in line at the Post Office.  (You can also send your extension via an IRS authorized private delivery service.  Beware, not all offerings are authorized and it does matter.)

Most states piggyback onto the federal extension, but not all of them.  New York, for example, requires a separate extension to be filed.

If you’re in most of California, you have an automatic extension until October 16th and you don’t have to send in an extension.

The Franchise Tax Board announced late yesterday that California is officially conforming to the IRS extension until October 16th for all tax returns due from January 10th through October 15.  Almost all of California is covered by the extension; only Imperial, Kern, Lassen, Modoc, Plumas, Shasta, and Sierra counties are not covered.  (The largest cities which still have March, April, June, and September deadlines are Bakersfield, El Centro, and Redding.)

The extension covers:

• 4th quarter 2022 estimated payments due on January 17th;
• Partnership and S-Corporation returns due on March 15th;
• Individual, C-Corporation, and Trust/Estate returns due on April 17th;
• 1st, 2nd, and 3rd quarter 2023 estimated payments due on April 17th, June 15th, and September 15th; and
• Almost all other tax forms due before October 16th.

Individuals in the federal disaster area do not need to do anything to obtain an extension: It’s automatic.  However, if you have moved from the area because you were impacted by the flooding or you reside outside of the area and were impacted and need the extension you do need to contact the IRS at 866-562-5227; I would also in such a situation contact the FTB.