Estimated tax payment the IRS doesn't (yet) know about

Question

I am doing my 2021 return and realized 2 things:

1. I underpaid my 2021 taxes via withholding, so much so that I may need to pay a penalty

2. There is a mistake on my 2020 taxes (this re-affirms my decision to do my own taxes this year!), that, once corrected, means I overpaid my 2020 taxes.

I see on the 1040X form that there is the option to apply the overpayment to the estimated taxes for the year of my choice (1040X, Line 23). In order to reduce or eliminate my 2021 penalty, I am thinking of doing the following:

1. Amending my 2020 taxes ASAP, and applying the overpayment to my 2021 estimated taxes.

2. Referencing this estimated payment on my 2021 return (1040, line 26), and on line 11 of form 2210 (if applicable), making the date April 15, 2021 as per instructions.

My concern with this plan is timing. I know that that amended returns take a looonnnng time to process, and am concerned that if my 2021 return is processed before my 2020 amendment, the IRS will be like "what estimated payment??" and send me a nasty letter. That said, if I don't do this plan, I will owe a greater penalty and/or have to amend my 2021 taxes as well as my 2020 taxes.

I am also considering filing the amendment now, computing my 2021 taxes shortly thereafter but filing an extension (with appropriate payment) and waiting until the amendment is processed to file for 2021. I am not confident, however, that the amended return will be processed before the extension date of October 15th.

Any advice? Specifically, what happens if the IRS processes a return claiming I've paid estimated taxes that they aren't (yet) aware of?

Answer 1

1040X (Amended return) can now be efiled, which can help reduce the time it takes for it to be processed. So yes, I'd suggest to amend 2020 ASAP, file an extension with payment, and file the 2021 return in October.

Specifically, what happens if the IRS processes a return claiming I've paid estimated taxes that they aren't (yet) aware of?

They'll send you a nasty letter, to which you'll respond "Look at the 2020 amended return filed on date XYZ".

Answer 2

Absolutely. I love that maneuver and have used it myself.

When you file 1040X and elect to have the refund applied to 2021 tax payments, that means it happened. It means it always happened that way, but IRS was unaware of it prior to the 1040X being filed. So it will count as timely payment toward your 2021 taxes, reducing or eliminating your late payment penalty.

This works because IRS thinks in an accrual mentality, not a cash mentality like most of us. It swings both ways, though: for instance, Congress had to push IRS to actually send 2020 stimulus checks; in their view, "sending a person a $1000 check in early 2020" was equivalent to "they claim credit on 2020 taxes and collect refund in April 2021". That wasn't cruelty; that was accrual thinking.