Extensions and payment plans to irs

[JenMO]

Can a taxpayer file an extension when he has set up a payment plan with the IRS to pay back taxes? Called client to ask if they wanted to file an extension, hadn't brought any of their stuff in yet, and she seemed to think they couldn't because of the payment plan. Not sure when they intended on filing, or were just going to file late without an extension. What's the scoop on this?

[Burke]

I am thinking the payment plan only remains in effect if all future taxes are paid when due. Otherwise, it is cancelled. So unless they are planning to pay all they owe with the extension, it may jeopardize that plan. However, you (and the IRS) won't know what they owe for 2012 until they file, so I don't think the extension is automatically rejected. But when they do file, they won't be able to get another installment plan while the one in effect still has an outstanding balance. What amt are you planning to put on the extension? If zero owed, then it should fly.

[JohnH]

I happen to have handled this situation many times. The extension will not affect the payment plan in any way, no matter what the extension says. Doesn't matter whether the extension shows a balance due or whether they pay all or part of the balance due on the extension. The only balance due situation which will invalidate a payment plan is when an actual return is filed without payment of any balance due. Even then, the taxpayer can normally get the IRS to consolidate 2 years into a new payment plan if under $25K is owed in total.

Sounds like the client is on the verge of giving up. Urge them to file the extension so as not to create a penalty snowball. I doubt they know the ramifications, so they need you to educate them and probably save them much more than your fee.

Incidentally, I like to be sure the figures n the extension reflect as much reality as is known at the time of filing. If there is withholding from W2, 1099, etc, then that figure should be correct. If the tax liability can be estimated, then that should also appear on the extension, regardless of whether they pay or not. (I remember sending one in one time that owed about $20K and they paid $100 with the extension request.) IRS requires that a "good faith estimate" be used, so all the knowns should be correct. It's even better to estimate the expected tax on the high side, because there's no reason not to do so.

The only time I ever saw an extension rejected after the fact was on a return that was audited and the guy had shown all zeros on the 4868, but when he filed he owed about $10K. (I had not filed the extension or the return) The auditor assessed a 25% FTF penalty retroactively because the taxpayer had not followed the instructions for the 4868.

[taxea]

The IRS is not charging a late payment penalty on returns with certain Forms. The forms are the ones they caused delayed filing on.
Check the IRS site for a list of those that apply.

[oceanlovin'ea]

they can file an extension

I have a client who always files an extension. She always owes the IRS money. She is on a payment plan with them and sends them several hundred dollars every month.
About 2 years ago they told her she could not be on a payment plan any more unless she made estimated payments during the year. (She is self employed but husband has taxes withheld from his wages). So now she makes her monthly payment to IRS and makes her estimated quarterly payments and all is fine. She owes for probably 3 or 4 years back. But IRS is okay with arrangement and she is okay with arrangement.

So encourage your client to start making estimated payments and get on a monthly payment plan and IRS should be okay and work with them.

Linda, EA