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To extend or not extend: That is the question

March 26, 2019  |  Stephanie Schmidt

To extend or not extend: That is the question

Extension: a four-letter word? To some, including CPAs, it may be. However, it may be a necessary evil in order to help make sense of the new tax laws.

In other words, time for plan B.

Because of tax reform, more people than usual may face tax extensions this year. You’ll likely be talking to clients who have had little or no exposure to this process, so broaching the subject of tax extensions can be a tough conversation to start.

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 are still looming.

There’s 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. OUCH! The loss of personal exemptions and the massive changes to Schedule A are taking many by surprise.  

And others who might benefit from extensions?

  • Those affected by natural disasters.
  • taxpayers who are out of the country.
  • Those with unexpected life events like a death in the family.

Keep in mind the following talking points to 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

A tax extension 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 can 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’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.

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 have to get 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.

And let’s not forget, 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.

Hang tight. There is light at the end of the tunnel!

Topics: Clients, Taxation-Individual, Taxation-Business

Stephanie Schmidt

Stephanie Schmidt is the MNCPA director of membership and marketing. For more than 10 years, she has expertly managed numerous member programs and events. Her skillset comes in handy when also planning sleepovers and birthday parties for her family. Stephanie has also earned the MNCPA’s unofficial title of office fashionista. Step into her office and you’ll see her knack for fashion, design and décor. She’s also a hugger, which you’ll appreciate if you’re ever trapped in a scary escape room with her. Stephanie can be reached at 952-885-5523 or sschmidt@mncpa.org.

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