Delaying Tax Filing Season due to COVID-19

Rumors are circulating that the Treasury Department is considering a delay of the April 15th tax filing deadline as the COVID-19 (popularly known as coronavirus) crisis progresses. Based on the trajectory of current events, there are good reasons those rumors should become facts. 

The Treasury Secretary has broad authority to delay both tax filing and tax payments. Section 6081 of the Internal Revenue Code says that the Treasury “may grant a reasonable extension of time for filing any return, declaration, statement, or other document required,” for up to six months. Section 6161 goes on to say that the Treasury Secretary, “may extend the time for payment of the amount of the tax shown, or required to be shown, on any return or declaration required under authority of this title (or any installment thereof),” for up to six months. If a federally-declared disaster is called, that authority extends further, to up to 12 months. Treasury can also lower the point in which an underpayment penalty is triggered. In 2019, they lowered it from its traditional 90 percent to 85 percent  and then to 80 percent to account for the first filing season under tax reform. This situation likely justifies moving it at least as low as 80 percent once more, if not lower. 

First, there are economic reasons to do this, as I wrote yesterday. As businesses deal with a decrease in consumers over the next several weeks and months, liquidity will be an issue. Delaying Quarter 1 and Quarter 2 estimated tax payments, which are due April 15th and June 15th respectively, allows businesses a cash cushion as they weather the economic crisis. The administration is also pressuring Congress to implement a payroll tax cut, which would impact a company’s liability too. Similarly, for employees whose hours or pay are being reduced due to the coronavirus, this functions as a short-term loan from the federal government. 

There are also logistical reasons to do this too. First, it allows the Internal Revenue Service employees to stay home themselves, by decreasing call volume and meetings. It also allows tax preparation clinics, such as those with the VITA program, to close for a short time to allow taxpayers and tax preparation volunteers to stay home. 

The flipside, however, is that many individuals receive a significant refund when filing their taxes. If they choose to take advantage of a delay in the filing deadline, it would have the impact of delaying the return of their overpaid tax dollars, exacerbating any financial crunch. Treasury should consider how to handle that question carefully, as processing refunds could help individuals with additional cash flow during the crisis. 

There is an obvious trade-off to any delay in the tax filing deadline: a decrease in federal revenues. Historically, April is a strong month for federal revenues, as businesses make estimated tax payments and Americans pay their tax liabilities. Delaying filing season decreases federal revenue in the short-run. That said, bond market volatility has driven the interest rate on federal debt down sharply, meaning the financial cost of delay is small. And in the context of Congress considering much more significant policy responses, the impact of this move would be relatively modest.

According to reports, the Treasury Department is still considering their options and how to implement such a policy. Details on the length of the delay and which tax forms and payments are delayed are being considered. Ideally, Congress would quickly pass a law providing additional clarity, but if they don’t, Treasury should move quickly to delay tax filing for at least six weeks to June 1, carefully monitoring conditions at the end of April to determine if the initial extension is sufficient. Additionally, states should follow this lead and delay  their own tax filing requirements. The City of Seattle has already done so, through a payment deferral policy for certain smaller firms subject to the business and occupation tax.