As a CPA, you know how to navigate a challenging filing season. One maneuver is to file tax extensions on behalf of some clients. This lengthens the time you have to complete their returns and it helps you adhere to 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,” said SCACPA CEO Chris Jenkins. “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. You might likely start talking to more 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 Sec. 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 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:
- Those affected by natural disasters
- Taxpayers who are out of the country
- Those with unexpected life events such as 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.
The 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.
Tax Reform and State Rules — South Carolina is among the states that allows for an automatic filing of state extensions when a federal extension is filed. Be sure to attach a copy of your valid federal extension to your South Carolina tax return when you file.
Business Rules — It’s 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.
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 include details of the extension such as 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.
Extensions remain 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.