This May Be the Tax Season of the Extension: What You Should Know

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As the days relentlessly march toward this year’s filing deadline, I suspect there will be an increased number of returns put on extension. Besides those relegated to the extension bin through chronic procrastination, the number of extended returns for tax year 2018 will definitely include those impacted by the Tax Cuts and Jobs Act (TCJA).

Rejoice! This year we get to revel in the ambiguities of the TCJA, spend hours explaining to clients why things are so different and dig deeply into the complexities of the new 199A deduction for small business owners. Any one of these is a reason to extend, but with all three in play, you have the makings of real excitement – and by excitement, I mean anxiety. With that planted in your mind, let’s talk about extensions and how you can manage the upcoming scramble to meet the April 15 filing deadline.

Get an engagement letter. Make sure you have an executed engagement letter from every client confirming the scope of your services and confirming that they are, in fact, your client. We all have that recalcitrant client who hides under a blanket of denial wishing away their annual reporting obligations. They provide nothing before the tax filing deadline. However, if they have not provided a timely executed engagement letter, are they actually your client? Have you been engaged to file an extension on their behalf? Here’s a hint: NO! Without being engaged, you cannot be certain of anything.

Make filing extensions part of the engagement letter. The engagement letter must specifically authorize the filing of an extension. It should also delineate the terms and conditions necessitating an extension. Clearly, if the client requests an extension, the issue is easy. However, what happens when filing an extension is initiated by the preparer? The engagement letter should anticipate and address this potential outcome. The idea is to put your client on notice as to what circumstances would require their return to be put on extension. An example of this would be when the preparer reserves the right to place a return on extension if the client fails to provide complete and accurate information and documentation as determined by the preparer by a given date.

Disclose what filing an extension means. The client must be informed that filing an extension only extends the due date for filing the return, not they payment of taxes. You know that, but does your client? Probably not. They need to be informed and understand the implications of failing to pay all taxes, even when the exact tax liability is unknown when the extension is filed. They need to know that the failure to pay the taxes subjects them to potential fines and penalties.

Demand adequate tax information and documentation. What do you do with the client who provides an executed engagement letter by the filing deadline, but nothing else?

The issue is the efficacy of filing an extension with significantly incomplete and inaccurate information. Remember that clients are notorious for ignoring and forgetting admonishments, so don’t think stern warnings delivered verbally are adequate. They won’t remember the phone calls you made or messages you left requesting information, so put it in writing and keep a copy. Tell them you cannot determine their tax lability without adequate information. Tell them they may suffer significant fines and penalties if they fail to pay adequate taxes with their extension. Tell them your crystal ball is broken. Protect yourself. Tell them what they need to do and the consequences of not doing it. Tell them in writing.

Determine the minimum amount of information you need to file a creditable extension and hold your ground. Generally, with the prior year return in hand, and client representations regarding variations between prior and current year finances, a reasonable estimation of tax liability is possible. When coupled with the amount of taxes withheld, a creditable extension can be filed. Make sure the client knows the calculated tax liability is merely an estimate and the liability arising from inaccuracies is on them, not you.

If you are thinking that you should just file the return and amend, remember that most limitation periods start from the filing of the return, not the extension. In addition, some tax positions can only be taken on the original return, not an extension. Finally, refunds are faster coming from properly filed original returns rather than amendments.

The earlier the client information is processed, the easier it is to file an extension. Don’t wait till April 14 to input information for extensions. When client information comes in the door, get it into Intuit® ProConnect™ Tax Online, Lacerte® or ProSeries® right away. The more information you put in, the greater the possibility you can notify your client of their potential tax exposure. This helps them avoid needless penalties and interest, and your errors and omissions insurance carrier will love you for it. Does it get any better than that?

In any tax year, extensions are just a part of life for the tax preparer and client, but this year, all bets are off. Spend the time to think how you want to handle extensions, and plan for a win-win scenario for you and your clients.

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  1. Have interesting situation. A married couple has a 20 unit apt building rented to families, therefore is a residential rental property and is owned by the husband solely as a proprietor, no corporate or partnership entities involved. He has a person that works for him about 34 hrs per week as an employee and pays him $35,000 a year in wages. He wants to setup aSIMPLE IR A plan for him an contribute 3% on his behalf. Since he files Sch E, what line does he report wages, payroll tax expense and SIMPLE IRA expense

    1. Schedule E, line 19, Other Expenses: Enter on line 19 any ordinary and necessary expenses not listed on lines 5 through 18.

      Please refer to IRS Publication 560, Retirement Plans for Small Business, for SIMPLE IRA rules. In general, you need earnings from self-employment to qualify.

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