Paying 90% of last year tax liability..

[AZ-Tax]

I have a client who paid in 2007, 110% of 2006 tax liability. Now he wants to file an ext because he will have a capital gain in 2007 but will not have the money to pay the tax till Sept 08. Correct me if I am wrong but since he paid 110% of 2006 he is ok up to and including April 15, 08 but beyond that he is subject to both penalty and interest?

[Jesse]

I believe that to be correct. By filing the extension client is saving the late filing fee, after 4/15 will be subject to underpayment penalties and interest until paid.

[JohnH]

He will be subject to a 1/2 of 1% FTP penalty and interest at about 8% APR, for a total of approx 1.25% per month from April until he pays the balance due. This is effectively an APR of about 14% he is paying on the unpaid balance, since the penalty and the interest are essentially the same thing because they are both non-deductible esxpenses.

The extension will relieve him o fthe 5% per month FTF penalty, which maxes out at 25%.

[Bill Tubbs]

Why not file the return?

I have a client who paid in 2007, 110% of 2006 tax liability. Now he wants to file an ext because he will have a capital gain in 2007 but will not have the money to pay the tax till Sept 08. Correct me if I am wrong but since he paid 110% of 2006 he is ok up to and including April 15, 08 but beyond that he is subject to both penalty and interest?

Why not just file the return now and let him pay when he can (presuming you have all the info needed to file the return, of course) ?

Bill

[AZ-Tax]

My exact thoughts Bill...

But maybe you have clients like this, they know it all : )

[JohnH]

Best laid plans sometimes go awry

One reason I can think of would be the possibility that the client won't have the $ in Sept as expected and has no other source of funds to pay the tax. By extending, he delays when the clock starts running on the collections process.

FIle the return in April, and by June the IRS is ramping up the pressure. He will have to either commit to an extended date to pay the tax or set up a payment arrangement and pay the associated $105 fee.

If the money is available in Sept, he files the return with payment, and there's no harm done. The FTP penalty and interest will be exactly the same either way.

But if there's a glitch and the money isn't in hand by Sept, then delaying filing until Oct pushes the drop dead date on collections out to Nov or Dec. He has more time to plan his nexct move before showing his hand.

Eventually he's going to have to pay, and he will pay the FTF penalty and interest up until he does pay, but he can decrease his own stress level by controlling the process insofar as he can.

[Gretel]

some more

My state doesn't recognized the extension unless 100% of the tax due is paid. So they would charge add.penalties for non-filing.

[LMathey]

I agree, extending the return extends the time to file not the time to pay. By not paying what is due or attempting to he is subjecting himself to underpayment penalties and interest. Looks like he just wants to push out any payment until 10-15 and is willing to pay the penalty and interest.

[JohnH]

Really?

I've always found this fascinating. We as tax preparers state that "extending the time to file does not extend the time to pay" because that's what the IRS says. But in actual practice that's exactly what happens.

Both the time to file and the time to pay are extended if it's done properly, with the understanding that there will be a cost for extending the time to pay. That cost averages about 14% APR when one adds up the FTP penalty and the interest. It's higher than second mortgage rates but lower than credit card rates.

That's critical information for a taxpayer who owes money and for whatever reason doesn't have the funds to pay. It's also information the client has a right to know in order to make an intelligent decision, and is one more reason we bring value to the table for the client..