Delayed Tax Filing: A Cost Effective Way to Avert Slowdowns
As the country continues to grapple with the spread of COVID-19, federal policymakers continue to debate methods of responding to the secondary economic effects of the outbreak. Not all policy responses are created equal, but one smart option that appears to be gaining traction is delaying tax payments and filings.
President Trump announced in a televised address that he would be using emergency authority to defer tax payment deadlines for individuals and businesses impacted by the virus. Details are scarce at the moment, but Treasury Secretary Mnunchin stated that “virtually all Americans other than the super-rich” would be able to take advantage of the opportunity to delay their tax payments.
When the President references “emergency authority,” there are a few provisions he’s speaking of. Sections 6081 and 6161 of the Internal Revenue Code grant the Secretary of the Treasury the statutory authority to allow an extension of up to six months for filing of tax returns and paying tax liabilities for any reason. Section 7508A also gives the Secretary the authority to defer tax payment liabilities for a year in the case of a federally declared disaster.
Given that Americans will have far more pressing matters on their minds than poring over their tax information over the next few months, a substantial delay of tax deadlines makes sense. After all, not only will taxpaying Americans be dealing with the effects of the virus over the next few months, but so too will Internal Revenue Service (IRS) offices — suddenly transitioning large amounts of federal workers to full-time telework would be a substantial task in the best of circumstances, but we’re just a month out from April 15.
A filing delay makes sense from a macroeconomic policy perspective as well. This is not a typical economic crisis, where the constraints businesses and individuals initially face are primarily financial in nature. Instead, they are social first and economic second: an economy that still largely relies on in-person interaction will have to contend with Americans being unwilling, or unable, to leave their homes, which could spiral into a significant recession.
That’s why other options the administration has explored are unlikely to be very effective, such as theproposed temporary payroll tax cut. Payroll tax cuts may be a means of letting Americans keep more of their own money, but that does little for the economy if Americans are holed up indoors. At-risk businesses such as restaurants would still lack the customers to sustain their operations.
But it means that deferring tax payments would be effective. Realistically, what American individuals and businesses that are impacted financially by the crisis need is short-term liquidity to act as a bridge between now and a return to normalcy. Functionally, that’s what a deferred tax payment is: an interest-free loan to allow at-risk people and businesses to handle the economic disruption brought about by COVID-19.
April 15 is not just the day that Americans pay their tax liability, but it’s also the day that business makes this estimated tax payment for the first quarter of 2020. The Secretary should delay those estimated tax payments too.
Treasury also has some more targeted tools at its disposal — the Department of the Treasury can also lower the threshold at which underpayment triggers a penalty from its usual level of 90 percent of tax liability. Last year, as taxpayers dealt with the effects of a shortened filing season due to the government shutdown, Treasury lowered this threshold twice, from 90 percent to 85 percent and eventually to 80 percent. Given what is sure to be a chaotic filing season, Treasury would be wise to consider similar measures again this year.
It remains to be seen how exactly President Trump’s announced tax deferment will function. But as a broad economic policy solution, deferring tax liability is a smart way to help American individuals and businesses negatively affected by the coronavirus outbreak to tread water until things return to normal.
