As CPAs, we know how to navigate challenging filing seasons. One of those maneuvers is to file tax extensions on behalf of some of our clients. This lengthens the time we have to complete their returns and helps us adhere to our quality control procedures and standards. However, it can be difficult for clients to recognize the benefits.
Clients can have difficulties understanding the purpose of tax extensions and may feel uncomfortable with the process, particularly if they have never gone on an extension before. Before notifying a client that an extension is necessary, CPAs should prep them for this possibility.
Because of tax reform, more people than usual may face tax extensions this year. That means you will likely be talking to clients who have had little or no exposure to these kinds of filings.
Clients with small businesses are highly likely candidates for extensions this year. The new Section 199A deduction for passthroughs is advantageous, but the new law was unclear, guidance was slow coming, and interpretation and implementation questions still exist among tax practitioners.
There is also a new group of clients likely to go on extension this year - those who are in shock or disbelief over the initial results of their return. The loss of personal exemptions and the massive changes to Schedule A are taking many by surprise.
Other clients who may benefit from extensions include:
- Those affected by natural disasters.
- Certain taxpayers who are out of the country.
- Those with unexpected life events like a death in the family.
Keeping the following points in mind can ease the tax extension discussion and help your clients understand the process.
How extensions work — A tax extension is a six-month postponement on the time to file, but not on the time to pay. Your client must understand that the estimated tax liability seen on the extension form is their responsibility and they should plan on making an estimated tax payment at the time the extension is filed. This payment can reduce or eliminate interest and late-payment penalties.
Benefits and risks — The advantage of a tax extension is it gives a preparer more time to compile all the needed information to file a return accurately. Extensions are often more cost effective than filing an amended return later down the line and do not increase the likelihood of an audit. However, there are risks involved with a tax extension, including accruing interest and penalties. A client who misses the extended deadline will face steep penalties.
April 15 deadline still matters — All payments on taxes owed must be paid by the April 15 deadline or your client may be charged interest and penalties. April 15 is also the last day your client may set up an IRA or make IRA contributions for the 2018 tax year. Married couples are not permitted to change their filing status from married filing jointly to married filing separately after the April 15 deadline even if they go on an extension.
Business rules — It is likely more business clients than usual will face tax extensions this year due to pending tax reform guidance. Those who own C corporations must file their 2018 tax return or extension by April 15. Like individual tax returns, a business extension filed through Form 7004 is an extension of time, not an extension to pay.
Tax reform and state rules — Many states allow for an automatic filing of state extensions when a federal extension is filed, but other states may have different procedures or impose greater interest and penalties. Review the state rules with your clients.
Due diligence — Because of the volume and complexity of tax extensions this year, extra due diligence is necessary. CPAs must obtain written authorization from their clients before filing tax returns on their behalf. This document should also include details of the extension like estimated tax payment amounts and an explanation of possible interest and penalties. Consult the AICPA Code of Conduct, Circular 230, AICPA Statements on Standards for Tax Services (SSTSs) and the Internal Revenue Code (IRC) while preparing your clients’ tax extensions this year.
And while it goes without saying, extensions are a tried and true method for spreading out the workload, especially during this last stretch when days are getting longer and patience is running shorter.