This bill creates a new safe-harbor rule intended to reduce or eliminate the late-payment penalty for individuals who pay a sufficient amount by the tax due date. Specifically, if a taxpayer pays 125% of their prior year’s income tax liability by the date prescribed for payment (including extensions), they would not be hit with the ordinary failure-to-pay penalty. The safe harbor has several conditions: it generally does not apply if the taxpayer fails to file on time, if there was no prior year return, or if the prior year was a short year; it also has special rules for joint filers and for periods after the due date or filing date. The bill would take effect for taxable years beginning after December 31, 2024. In short, the SAFE Act would help some individuals avoid the failure-to-pay penalty by pre-emptively paying more than their prior-year tax bill, but only under specific filing and timing conditions.
Key Points
- 1Creates a new safe harbor under Internal Revenue Code section 6651(c): an individual who pays 125% of their prior year’s tax by the due date (including extensions) would avoid the failure-to-pay penalty.
- 2Conditions and limitations:
- 3- The safe harbor applies only if the taxpayer files on time and pays 125% of the prior year’s tax by the due date (including extensions).
- 4- It does not apply if the taxpayer fails to file on time, if there was no prior-year return, or if the prior year was a short taxable year (less than 12 months).
- 5- For joint filers, the calculation considers the prior year’s tax amounts for both spouses and has specific rules if one spouse did not file a joint prior-year return.
- 6- An additional-payments condition exists: the exception does not apply unless additional payments are made with the timely filed return. (This language may require further clarification in practice.)
- 7Administrative changes: The heading of section 6651(c) would be changed from “Rule” to “Rules.”
- 8Effective date: Applies to taxable years beginning after December 31, 2024.
- 9Title: The bill is titled the Simplify Automatic Filing Extensions Act, or the SAFE Act.