Does filing extension with zero's avoid failure to file penalties?

[Zee]

I'd have two questions. First, I'd like to confirm what others have said indicating filing an 4868 extension with zeros avoids the failure to file penalties. I don't think so. If that's true, is there any purpose in filing an extension without a calculation?

I also have a second question. If a US taxpayer is working overseas on 4/15/09 and anticipates staying overseas for some time, it's my understanding that an automatic 2-month extension is available to file and pay any taxes due. Interest, however, will be charged. In this case, it appears the late filing penalties can be avoided if the two month the return is filed and taxes paid within the two month time period. it also appears there is no form for this extension, and it simply requires a note attached to the tax return. Is that correct?

[JohnH]

I've seen many extensions filed with zeros and there was no FTF penalty assessed. But none of them were ever audited. That tactic is definitely risky, though. I did see one several years ago that was audited and the extension was retroactively denied - the auditor tacked on the FTF penalty as a part of the audit report. ( BTW, I didn't file the extension). My conclusion is that zeros will get the extension through the system initially, but it is subject to review if the return is audited. Not a pleasant place to be in.

It seems that the best thing to do is enter some sort of estimate of tax liability on the return, no matter how outrageous. I tend to estimate liablity on the high side, especially if the client isn't going to pay it all, because there's no downside to a high estimate. The extension can't be denied for underpaying the estimate - as a matter of fact there's no payment even required with the extension.

I think it's also wise to enter a correct figure for the tax withheld and/or estimated tax payments on the extension because these figures are usually fairly easy to ascertain. Bottom line is that if the extension meets the requirements, then it's valid. The instructions are pretty clear on the 4868, so I don't see how IRS could invalidate an extension that meets their good-faith requirements. But if it doesn't, then the taxpayer is vulnerable.

I've had a few situations in which the taxpayer was out of the country - usually military. I filed the extension anyhow, just to make me feel better and to cover the unlikely situaiton that they might return to the US unexpectedly on Apr 15 (family emergency, personal illness, etc).

[Zee]

I've seen many extensions filed with zeros and there was no FTF penalty assessed. But none of them were ever audited. That tactic is definitely risky, though. I did see one several years ago that was audited and the extension was retroactively denied - the auditor tacked on the FTF penalty as a part of the audit report. ( BTW, I didn't file the extension). My conclusion is that zeros will get the extension through the system initially, but it is subject to review if the return is audited. Not a pleasant place to be in.

It seems that the best thing to do is enter some sort of estimate of tax liability on the return, no matter how outrageous. I tend to estimate liablity on the high side, especially if the client isn't going to pay it all, because there's no downside to a high estimate. The extension can't be denied for underpaying the estimate - as a matter of fact there's no payment even required with the extension.

I think it's also wise to enter a correct figure for the tax withheld and/or estimated tax payments on the extension because these figures are usually fairly easy to ascertain. Bottom line is that if the extension meets the requirements, then it's valid. The instructions are pretty clear on the 4868, so I don't see how IRS could invalidate an extension that meets their good-faith requirements. But if it doesn't, then the taxpayer is vulnerable.

I've had a few situations in which the taxpayer was out of the country - usually military. I filed the extension anyhow, just to make me feel better and to cover the unlikely situaiton that they might return to the US unexpectedly on Apr 15 (family emergency, personal illness, etc).

OK. What about question #2, it appears the FTF penalty is avoided with the two month extension since no taxes need be paid. That's much different than the 6-month automatic extension.

[Snaggletooth]

No FTF Penalty

A proper extension, even with zeros, assures there will be no failure to file penalty for the April 15 deadline.

However, the zeros can launch another penalty. I think it might be called "penalty for understating tax liability on extension."

In other words, you file a zero extension. Later, the return is filed, showing taxpayer payments of $3500, a $2000 liability, and a $1500 refund.

The taxpayer can be penalized (even though he was due a refund) because he claimed a liability of $0 on his extension and his tax liability was actually $2000.

[taxea]

I don't think so

I seriously doubt that the IRS would impose this penalty if the payment is made by 4/15.
I do extensions with zero's when I get the returns late and don't have time to complete and file the return by the 15th. I do,however, advise the client of any tax due and make sure a check is sent prior to the deadline.

[Jiggers]

Accurate Extensions

I would hate for the client to get a penalty for an inaccurate 4868 or have the 4868 voided completely with a large tax liability when the return was actually filed.

We used to do these many moons ago when the IRS required the payment to be made or it was voided.

Now the IRS allows balance due 4868's and no payment is required. I complete them all the time, though not real accurate, but close to the prior year balance due, unless the client has something new this year.

It also helps charge the $50 that I charge for doing an extension!

[JohnH]

I seriously doubt that the IRS would impose this penalty if the payment is made by 4/15.
I do extensions with zero's when I get the returns late and don't have time to complete and file the return by the 15th. I do,however, advise the client of any tax due and make sure a check is sent prior to the deadline.

I still maintain that filing an extension with all zeros will unnecessarily expose the client to a potential retroactive FTF penalty. The system won't automatically pick this up, so it will only arise if the return is later audited. I would never file an extension with all zeros unless I was absolutely certain that was the case, and if that's true then the extension was never needed in the first place so I'm just filing the extension to make the client (and me) feel a little better.

However, I wouldn't want to be in the position of reviewing the results of an audit and trying to explain to the client why he was assessed a 25% penalty in an audit when all I needed to do on the original extension was to enter some sort of reasonable figures. One never knows what can happen in those situations - as a matter of fact the auditor might just take the time to explain that fact to the client, especially if the audit were in any way contentious for other reasons. Sounds like fertile ground for an E&O claim under the right circumstances (irrespective of any written agreement with the client).

And I agree with Jiggers, if the estimate of the tax liability is so uncertain that you have no confidence in it at all, then using the prior year's tax liabilty would be a good fall-back position. I'd have no trouble explaining that to an auditor and I doubt it would be challenged.

[Zee]

Snag, I disagree.

First, it's my understanding that unless 90% or more of the tax due is paid with the extension, the late filing penalty (LFP) might apply. I've always filed zero dollar extensions in the past, with the understanding that the LFP would be avoided. After reading the instructions, I believe that is wrong. However, it is possible it isn't enforced regularly.

If you're suggesting a LFP might be assessed in the situation where the extension was filed, but a refund resulted on the actual return that doesn't make sense. I've never seen a penalty in a refund situation.

[JohnH]

Zee: The 90% rule went out the window years ago. See the instructions on the back of Form 4868. Filing an extension request showing $10,000 in estimated tax libility, zero tax withheld or paid, and including no payment with the extension would be just as valid as paying the $10,000 with the extension.

Here's an excerpt from the general instructions: "Although you are not required to make a payment of the tax you estimate as due, Form 4868 does not extend the time to pay taxes. If you do not pay the amount due by the regular due date, you will owe interest. You may also be charged penalties."

The wording is very crafty. It clearly says you don't have to pay anything, but then implies that you may be assessed penalties. I think that's by design in order to spook the casual reader into questioning whether a low payment or no payment will invalidate the extension. The fact is it won't. The wording omits the fact that the penalties referred to are FTP penalties and Estimated Tax penalties, never FTF penalties.

Also, look at the specific instructions for Line 7. "If you find you cannot pay the amount on line 6, you can still get the extension." Then it goes on to explain interest and FTP penalites. Nowhere is there any mention of the FTF penalty being tied to the amount paid.

The only mention of the extension request being null and void after the fact is found as a caution under the specific instructions for Line 4 - Estimate of Total Tax Liability. Get this figure right (or reasonable) and you're home free.

BTW: I'm not trying to call anybody out or score debating points in this discussion about extensions. However, I do think it's important that we know exactly what can and can't be done in order to serve our clients' interests the best. Having a good handle on how extensions actually work can be a huge stress reliever for us and our clients. Neither they nor we need any more stress added, especially at this time of the year. Most importantly, I want to be proven wrong if I'm off base on anything I'm doing in my own practice with respect to extensions.

[thomtax]

Hypothetical question

Suppose that an extension is filed with all 0s. Then, before April 15, additional info comes in that there will a balance due, but will not be filed before April 15.

Can another extension be filed showing the additional amount due?

LT

[David1980]

I don't see the purpose of filing an all 0's extension. At the absolute minimum, you could just fill in last year's numbers for tax liability. After all it isn't going to change too much year to year, certainly that would be closer than $0 and since they never pay anything anyway with the extension...

[Nashville]

Of Course

Thomtax, yes. It's called an amended extension return. All you have to do is download Form 4868-X and file it.

Sorry, Thom, I couldn't let that one pass by.

Seriously, I don't know the answer to your question, but I think it would be O.K as long as done prior to April 15th.

[thomtax]

I don't see the purpose of filing an all 0's extension. At the absolute minimum, you could just fill in last year's numbers for tax liability. After all it isn't going to change too much year to year, certainly that would be closer than $0 and since they never pay anything anyway with the extension...

Actually, this year did change a lot. They had always been W2 before and usually got a refund. This year, I just found out, worked as contract labor all year and will probably owe around $10,000.

In prior years, it was just a cover because they are always late. Nice people, but just hate doing taxes.

LT

[Zee]

Zee: The 90% rule went out the window years ago. See the instructions on the back of Form 4868. Filing an extension request showing $10,000 in estimated tax libility, zero tax withheld or paid, and including no payment with the extension would be just as valid as paying the $10,000 with the extension.

Here's an excerpt from the general instructions: "Although you are not required to make a payment of the tax you estimate as due, Form 4868 does not extend the time to pay taxes. If you do not pay the amount due by the regular due date, you will owe interest. You may also be charged penalties."

The wording is very crafty. It clearly says you don't have to pay anything, but then implies that you may be assessed penalties. I think that's by design in order to spook the casual reader into questioning whether a low payment or no payment will invalidate the extension. The fact is it won't. The wording omits the fact that the penalties referred to are FTP penalties and Estimated Tax penalties, never FTF penalties.

Also, look at the specific instructions for Line 7. "If you find you cannot pay the amount on line 6, you can still get the extension." Then it goes on to explain interest and FTP penalites. Nowhere is there any mention of the FTF penalty being tied to the amount paid.

The only mention of the extension request being null and void after the fact is found as a caution under the specific instructions for Line 4 - Estimate of Total Tax Liability. Get this figure right (or reasonable) and you're home free.

BTW: I'm not trying to call anybody out or score debating points in this discussion about extensions. However, I do think it's important that we know exactly what can and can't be done in order to serve our clients' interests the best. Having a good handle on how extensions actually work can be a huge stress reliever for us and our clients. Neither they nor we need any more stress added, especially at this time of the year. Most importantly, I want to be proven wrong if I'm off base on anything I'm doing in my own practice with respect to extensions.

Let's see if I understand this correctly. First, there are two penalties the IRS may assess. Failure to File and Failure to Pay. Both seem to be about 5% of the unpaid amount per month. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

The first & second paragraph of Page 3 of the 2008 Form 4868 reads:

"The late payment penalty will not be charged if you can show reasonable cause for not paying on time. Attach a statement to your return explaining the reason. Do not attach to Form 4868".

"You are considered to have reasonable cause for the period convered by this automatic extension if at least 90% of your actual 2008 tax liability is paid before the regular due date of your return through Witholding, estimated tax payments, or payments made with Form 4868".

I don't see anything that would forgo the failure to file penalty assuming you submit a 4868 with zeros as Snag indicated. Nor, will the failure to pay penalty be waived if you don't meet the 90% hurdle.

Am I missing something? I don't mean to get into a debate either. I always understood the FTF penalty would be waived if you filed a 4868 with zeros. It isn't always as easy as it seems. Last years amounts may not have any relation to this years income & expenses in many situations.

[JohnH]

Zee: Thanks for responding to the "debate" comment, just to clarify things. This subject is too important for anyone to get distracted by misinterpreted 'tone of voice" or a poorly worded reply.

First of all, let's get the penalties clear. As I understand it, he FTF penalty is 5% per month and it maxes out at 25%. The FTP penalty is only .5% per month (1/2 of one percent). It also maxes out at 25% if it runs on its own long enough ( 50 months). There's some coordination between the two when they both apply to a late-filed return, but a valid extension takes the 5% per month FTF penalty completely off the table, provided the extended due date is adhered to. The extension has no effect on the interest or FTP penalty, but I'd much rather be dealing with .5% than 5%.

The first & second paragraphs of page 3 of the 4868 apply only to the FTP penalty. They don't have anything to do with the FTF penalty as I understand them.

Finally, the reference to using last year's tax liability is mentioned only as a last resort, when it's clear that not enough information is available to even hazard a guess. Using last year's liability is better than pulling a figure out of thin air. I've done that a few times when the taxpayer was ill or otherwise indisposed and I just had no information on which to base an estimate. That's why I continue to say I'd never be comfortable with an extension showing all zeros, unless I was near 100% certain that all zeros was a factually accurate estimate.