N C D O R Situation

[erchess]

Clients (MFJ) properly extended Federal and NC then filed and paid by the extended deadline yet NC is wanting to charge penalty and interest. I get the interest part but what's this about penalty??? Are all my extended clients going to get this penalty?

Client called NC on his own (and yeah I told him not to do that again) and got offered a one in three years waiver of penalty for previously compliant taxpayers. Problem is while TP is previously compliant the S is just starting to file her last fifteen years worth of returns. I realize that they will probably get the penalty waived if they apply but will they subsequently get it "unwaived" with additional P & I? Do I have an ethical problem here if I sign the waiver application? (I would think I do.) Do I have an ethical problem if I fail to advise them not to ask for the waiver? (I am less certain but I would think so.)

[JohnH]

What penalty were they assessed - was it a Failure to Pay or Failure to FIle penalty? If they owed money on Apr 15 but didn't pay until later, they are liable for a flat 10% Failure to Pay penalty, plus interest. The 10% FTP penalty applies regardless of whether they paid on Apr 16 or Oct 15.

If they were assessed a 5% per month Failure to FIle penalty, then you should be able to get it removed by providing NC a copy of the extension request.

As for the penalty waiver request, I'd tell them the rules and let them make up their mind on whether they qualify. If they decide they do, let them file the request themselves - why should you bother signing it?

[erchess]

I've not seen the letter

or talked to anyone at NCDOR but I assume it is FTP since the lady they talked to acknowledged that they did the extension but said this penalty applied anyway.

I take it that you are saying that I don't need to disengage from this client just because they apply for a penalty waiver on grounds ranging from questionable to non existent. That's good but I wonder if anyone here disagrees.

Are there applicable rules that are not covered in NC's page of instructions that print with the request form?

She is going to be looking at more P & I than tax in the years going back to at least 2000. The way I understand it she can't get a penalty waiver because she doesn't have three prior years of good compliance as of the time she will catch up with the returns. Would you agree with that?

[JohnH]

If NCDR acknowledged that extension, then it must be the FTP penalty they are concerned about. As I said, it's a flat 10% reagrdless of when the tax is paid after Apr 15. Then interest is added on a monthly basis until the tax is paid.

I don't see how you have any involvement if the client files the waiver request. Paying the tax, penalties, and interest or requesting a waiver is an entirely separate matter than preparing the return.

If you search "Penalty Waiver" on the NCDR web site, you'll find all the info they have. But the Form 5500 instructions cover virtually everything for most taxpayers.

Since the wife has so many back years to file, they probably should wait until all the returns are in before deciding which penalty waiver to request. First of all, NCDR will require it. Secondly, she does need to decide which waiver will benefit her the most. The current year penalty is 10%, whereas those prior years will be incurring a 10% FTP penalty plus a 25% FTF penalty. So even if the tax liability is lower in a prior year, the penalty may be greater. (interest isn't relevant since it isn't subject to waiver)

[gboykin]

Not sure if you are aware of the Voluntary Disclosure Program, but I have had success using it with a couple of clients. If you have a contact at NCDOR, use them. I have several at the Wilmington office, and if you get the right person, it is really smooth.

Here is a link you can check out: http://www.dor.state.nc.us/practitioner/voluntary.html

[Gary2]

A number of states will invalidate the extension, and thus invoke the "failure to file" penalty if the balance due with the extended return is more than some percentage of the total tax liability. Or they'll invoke it if the estimated taxes aren't paid, even if the extension results in a refund.

Is it possible that something like this is triggering it?

[FEDUKE404]

Who filed the extensions?

Reading through this thread, I get the impression that you did not prepare/file the extensions for NC. For that reason alone, if I were you I would be very reluctant to sign any waiver statements.

Even so, as JohnH has noted, the mere "filing" of an extension does not make penalties evaporate. In theory the full amount was due in April. IF that amount was not paid (even though NCDOR "acknowledged" the extension was filed) they are looking at penalties for late payment and/or underpayment.

A person can easily file the extension form (NC D-410) online. BUT part of the process is (similar to the feds) stating how much tax is owed. IF that is a positive number, then to complete the process payment information (RTN/DAN or credit card) must be provided.

If during the calendar year proper withholding/estimated payments were not made, that in theory could add to the "taxes" due that NCDOR is now considering.

FWIW: Having a spouse who has apparently not filed in 15 years may not be helping the overall situation.....

FE

[erchess]

I did file the extensions

electronically and I have in my files print outs from my software company for the Federal and from the website for the State. Time was when NC would consider State extended if Federal was. I learned about the change too late to save one client from the ftf penalty but naturally I picked that up and it wasn't very much.

[JohnH]

A number of states will invalidate the extension, and thus invoke the "failure to file" penalty if the balance due with the extended return is more than some percentage of the total tax liability. Or they'll invoke it if the estimated taxes aren't paid, even if the extension results in a refund.

Is it possible that something like this is triggering it?

Not in NC. The state of NC follows the same rules as the IRS. It doesn't matter how much is owed or whether the taxpayer pays any of the amount owed when the extension is filed. Simply filing the extension with a reasonable estimate of the amount due will relieve the taxpayer of the FTF penalty, thus saving the taxpayer from imposition of the 5% per month FTF penalty which maxes out at 25%. However, NC imposes a flat 10% FTP penalty on the underpayment, plus interest. This contrasts to the IRS FTP penalty of 1/2 of 1% per month, plus interest.

[JohnH]

Not sure if you are aware of the Voluntary Disclosure Program, but I have had success using it with a couple of clients. If you have a contact at NCDOR, use them. I have several at the Wilmington office, and if you get the right person, it is really smooth.

Here is a link you can check out: http://www.dor.state.nc.us/practitioner/voluntary.html

That is very interesting. I've never had occasion to use it because most of the time they only get the urge to file when the state is breathing down their neck. Edwin, if you proceed with preparing the delinquent returns, this is definitely something worth looking into.

[FEDUKE404]

NC follows US ?

electronically and I have in my files print outs from my software company for the Federal and from the website for the State. Time was when NC would consider State extended if Federal was. I learned about the change too late to save one client from the ftf penalty but naturally I picked that up and it wasn't very much.

I don't remember in any times near the present (this millennium) where NC would ever "consider" an extension filed if there was a federal same. I do recall that NCDOR would accept the relevant numbers reported on a federal form....but it still had to be filed/paid in a timely manner.

Of course, part of this issue was that there for a long time was the "automatic" extension to June 15th and the "you gotta have a reason and be approved" extension to October 15th. Thankfully those days are behind us.

So did the client pay any/all/some of the expected balance due with the electronically filed NC D-410 ?? That answer would seem to be quite relevant as to what might be going on here.

FE

[JohnH]

I don't remember in any times near the present (this millennium) where NC would ever "consider" an extension filed if there was a federal same. I do recall that NCDOR would accept the relevant numbers reported on a federal form....but it still had to be filed/paid in a timely manner.

Of course, part of this issue was that there for a long time was the "automatic" extension to June 15th and the "you gotta have a reason and be approved" extension to October 15th. Thankfully those days are behind us.

So did the client pay any/all/some of the expected balance due with the electronically filed NC D-410 ?? That answer would seem to be quite relevant as to what might be going on here.

FE

I'm pretty sure this is the sequence:

1) Prior to 1995, when you filled out the 4868, you were required to send a copy of the 4868 to NC with the words "NC COPY" written on the top, lining through the Federal numbers, and entering the NC numbers in the margin. Both were 4-month extensions, which meant you had to do the Form 2688 drill on August 15 again for both Fed and NC.

2) NC introduced the D-410 for the 1995 tax year. It was a 6-month extension from the outset. So after 1995 you only had to file the 2688 with IRS on Aug 15.

3) IRS made the 4868 a 6-month extension in 2005, thus saving procrastinators a lot of August 15th hassle and sparing lots of trees in the process.

I don't recall a time when NC automatically accepted the filing of the 4868 with IRS as a valid extension - I think NC always required a separate filing (that would be the altered 4868 & 2688 prior to 1995, and the D-410 after 1995).. However, in the 1990's and before, I don't think NC had a good system of tracking extensions, and for many years you were supposed to attach a copy of the 48698 to both the Fed and NC returns. So if you just attached a copy of the Federal 4868 to the NC return, they probably assumed you had filed the required NC copy back on Apr 15 and didn't hassle you about it.