As many of us are very aware, many tax software providers have had real problems getting their systems up and running to handle filings of 2021 returns on both the federal and state level. The IRS added a number of new forms this year related to passhthrough entities (including the Schedules K-2 and K-3 that have consumed so much professional time these past couple of months due to IRS clarification of the instructions) and a large number of states have instituted brand new passthrough entity taxes that mainly took effect this year, with the required forms and instructions being issued late by many state taxing agencies.

All of this created a lot of new coding to be done to provide support for these forms and returns, more than the vendors would normally face. With much of the guidance coming late in 2021 or into the first couple of months of 2022, there also was not a lot of time to get all of this new code written and tested. The vendors have ended up having to delay when they would be able to transmit impacted returns.

Unfortunately, these delays created an issue for taxpayers who are farmers and fishermen. Under IRC §6654(i), qualifying farmers and fishermen are only required to make one payment of estimated income taxes and, so long as they file their tax return by March 1 of the following year, can make that entire payment with the tax return. In a News Release announcing special relief this year, the IRS notes these rules:

Qualifying farmers and fishermen are those who are not subject to an addition to tax for failing to pay the required estimated tax installment payment by January 15, 2022, if they file their returns and pay the full amount of tax reported on the return as payable by March 1, 2022.[1]

Unfortunately, a number of tax software vendors were not yet able to electronically file new Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations by March 1. The new form is required to be filed by many, if not most, individuals who hold stock in an S corporation with their 2021 income tax return.[2]

Thus, if a software provider was not able to electronically file a return with that form by March 1, the farmer or fisherman either had to file the tax return on paper, something the IRS and most practitioners strongly discourage due to the huge backlog of unprocessed returns from prior years, or face the prospect of paying an underpayment of estimated tax penalty for not having paid the minimum single estimated tax payment due by January 15.

The news release notes:

The IRS is aware of a third-party software issue affecting qualifying farmers and fishermen attempting to electronically file Forms 7203.[3]

The news release promises that relief will be forthcoming for those who electronically file their return and pay the tax due by the original unextended due date:

Due to these challenges, the Treasury Department and the IRS intend to issue a notice providing penalty relief for qualifying farmers and fishermen filing Forms 7203 if they electronically file their 2021 tax return and pay in full any tax due by April 18, 2022, or by April 19, 2022, for those qualifying farmers and fishermen who live in Maine or Massachusetts.[4]

Presumably, the IRS will issue a formal notice or other guidance giving implementation details for requesting this relief.

[1] “IRS update regarding recent electronic filing challenges in connection with Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations,” IRS News Release IR-2022-49, March 3, 2022, https://www.irs.gov/newsroom/irs-update-regarding-recent-electronic-filing-challenges-in-connection-with-form-7203-s-corporation-shareholder-stock-and-debt-basis-limitations (retrieved March 5, 2022)

[2] See Ed Zollars, “Formal Draft of Proposed Form 7203 to Report S Corporation Stock and Debt Basis on Form 1040 Released,” Current Federal Tax Developments website, October 23, 2022, https://www.currentfederaltaxdevelopments.com/blog/2021/10/23/formal-draft-of-proposed-form-7203-to-report-s-corporation-stock-and-debt-basis-on-form-1040-released (retrieved March 5, 2022)

[3] “IRS update regarding recent electronic filing challenges in connection with Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations,” IRS News Release IR-2022-49, March 3, 2022

[4] “IRS update regarding recent electronic filing challenges in connection with Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations,” IRS News Release IR-2022-49, March 3, 2022