Extension on balance due

[Bill Tubbs]

I've had a few returns that have balances due and clients can't pay. One thought was that if I filed an extension for them that the IRS/state wouldn't know how much they owe and therefore wouldn't be hounding them for the money all summer (which the clients can hopefully gather the needed money). But, when we file an extension, it asks for liability and 2010 payments, and calculates the amount due.

Question is: does the IRS use this balance due (Form 4868, line 6) to send notices to clients, or do they wait til the actual return is filed before sending balance due notices?

[yes, clients have been made aware extension is good til Oct, and that interest accrues on any balance due after 4/15]

Thanks,
Bill

[BOB W]

My understanding is that at the time the 1040 is filed the extension will be considered Void if 90% of the taxes are not paid with the extension.

I may be off on the 90%>> but the extension will be voided and penalties and interest will apply if no payment is made with the extension.

[Jiggers]

I've had a few returns that have balances due and clients can't pay. One thought was that if I filed an extension for them that the IRS/state wouldn't know how much they owe and therefore wouldn't be hounding them for the money all summer (which the clients can hopefully gather the needed money). But, when we file an extension, it asks for liability and 2010 payments, and calculates the amount due.

Question is: does the IRS use this balance due (Form 4868, line 6) to send notices to clients, or do they wait til the actual return is filed before sending balance due notices?

[yes, clients have been made aware extension is good til Oct, and that interest accrues on any balance due after 4/15]

Thanks,
Bill

The IRS doesn't send any notices based on the 4868 extension balance due and not paid.

That is just an estimate. That may or may not be correct.

Also, penalty also is due on any balance due that is not paid by 4/15 (4/18 this year).

Depending on the amount still owed, I tell the client that they should file the return by 4/15 and attach a request for installment payments. I think the form is 9465. That way it gets it out of your hand and get the taxpayer making monthly payments.

[ChEAr$]

Nothing wrong with mailing in the extension along with the form 9465 which is what IRS recommends.

As usual I don't hold with extensions and will not do them ordinarily. If someone doesn't show up until april 14th without their documents asking for an extension I smile and send them away.

the only one this year is for a client in IRAQ who hasn't met the 330 day test yet, but will by October 15th. Along with his extension (form 2350) was the $ 8,000 balance due I projected.

[Gretel]

Also keep in mind that penalties for non-filing (if no valid extension) as well as higher penalties for non-payment (if memory serves right) are assessed by IRS.

[PIGLEE]

If someone owes, and can nnot pay, I try and get the return filed for them. That saves them the penalty for late filing, I think it can be up to 25%. Also if they want an installment payments. IRS is very interested if they have filed on time.

[Gary2]

Also keep in mind that penalties for non-filing (if no valid extension) as well as higher penalties for non-payment (if memory serves right) are assessed by IRS.

The penalties for not filing are higher than the penalties for not paying, though they're capped.

[Gary2]

My understanding is that at the time the 1040 is filed the extension will be considered Void if 90% of the taxes are not paid with the extension.

I may be off on the 90%>> but the extension will be voided and penalties and interest will apply if no payment is made with the extension.

There are states that work that way, but not the IRS. If you file an extension on time, even with no payment, and then file the return on time, the extension is valid and you won't have to pay any failure-to-file penalties.

That still leaves the other two costs: the interest charges and the failure-to-pay penalties.

You will have to pay interest on any amount that isn't paid by the original due date, regardless of what percentage is paid.

The only way the 90% comes into play is with the failure-to-pay penalty. The failure-to-pay penalty won't apply if you pay 90% of the tax liability by the original due date and the rest by the extension due date.

[JohnH]

Bill: The Form 4868 is valid not matter how much or how little is sent with it, provided it's filled out correctly and timely filed. For example, you can show an estimate of $10,000 due & send $25 with the extension and it will still be perfectly valid. There's not even a requirement to send any money with the extension for it to be valid.

The IRS does require that the estimate of the balance due be reasonable, based on information known at the time the extension is filed. That is all that's required for the extension to be valid and to avoid the 5% per month FTF penalty, which caps at 25%. If the return is later audited and the original estimate is determined to have been unreasonable, the extension COULD be retroactively denied, although I've only seen that happen one time with a taxpayer-prepared extension, and that situation was so outrageous that it didn't pass the laugh test. So the most important thing to do when filing an extension is to be sure the estimate of tax due is accurate - when in doubt show it at the higher amount because there's no harm in doing that.

The IRS will charge them interest (currently around 4% APR), plus a 1/2 of 1% per month Failure to Pay penalty (which equates to a 6% APR). This means that the client will be paying an EFFECTIVE interest rate of roughly 10% APR on the unpaid balance from Apr 15 until the balance is paid in full. There might also be an estimated tax penalty due, but that would have been due even if the return were filed on Apr 15, so it's irrelevant when deciding on an extension strategy.

You are correct in assuming that the extension will give the client until Oct 15 before the clock starts running with IRS collections. They don't come looking for the balance due until a return is filed, no matter what shows on the 4868. That can be important for someone on the ropes who needs some financial breathing room. On the other hand, if they want to get the return filed and get started paying the taxes, then they should file now and immediately set up the payment arrangement. It appears form your initial post that the client needs the breathing room, so in my opinion you are giving them the best option for them at this time.

Your state rules may be vastly different from how the IRS rules work on this matter.