Done !

[ChEAr$]

Thanks

for your going the extra mile, John.

Just goes to show you I reckon: time sure flies when you're having fun!

[Black Bart]

Good analysis.

...if you read the 4868 instructions you'll see that they clearly say to file the extension even if you can't pay it all, and the extension will be valid. People run into problems when they don't furnish a reasonable estimate of the amount of tax due, but they have no problem if they short pay or don't pay.

I think the IRS is actually very savy in the way they handle this now. They say "an extension of time to file isn't an extension of time to pay"...but the fact is that an extension of time to file is an extension of time to pay - it simply adds a charge of about 14% APR to the balance due...by holding the threat of an additional 5% per month penalty over the taxpayers' heads, they gently ease them into the system even when they can't pay up...

That's the best, clearest explanation I've come across on the 4868, John, and I figured it had changed some but didn't know it was '95 and had not really noticed the addition of line seven. As you say, it must have apparently been done to drag in the non-filers -- offering them a carrot without completely retiring the 5% stick, so to speak.

Still, many others -- taxpayers and tax preparers alike -- have used it for years as an extension of time to pay no matter what IRS' policy/intention was. While some of my clients know roughly how much they'll owe; others haven't a clue, so we plug in the figures if they've got 'em and all zeroes if they don't. I have never had a late filing penalty assessed as a result of erroneous 4868 figures, so I was a little curious to know what kind of problems you were referring to or might have run into when a reasonable tax estimate wasn't furnished.

Thanks,

BB

[JohnH]

Make your estimate as accurate as you can with the
information you have. If we later find that the estimate
was not reasonable, the extension will be null and void.

Bart: I copied the above from the line 4 instructions on the 4868.

As a practical matter, the only way the IRS can "later find" that the estimate was not reasonable would generally be if the return is audited. In practice, I have only seen that happen one time and it was an extreme situation. It was a return prepared by someone else, it was under the old rules (pre-1993), and the taxpayer was audited. Their extension showed -0- on all lines (no tax liability, none withheld, and none paid with the extension. The actual return showed a $3,000 liability from self-employment income. The audtior's notes said the penalty was assessed for failure to properly provide a reasonable estimate at the time the extension was filed, so it was retroactively denied.

I'm a little afraid of all zeros for the reasons demonstrated above. If the taxpayer intends to only make a partial payment with the 4868, then I tend to think that overestimating the tax liability is the safest way to go. There's no downside to estimating the tax liability high, since the final return is going to govern the actual numbers anyhow and since we know the extension will be accepted no matter how far apart the estimate and the actual payment are. And if there is an audit, the taxpayer would be less likely to be accused of providing an unreasonable estimate with the initial extension request if their final tax liability is lower then the estimated amount..

[ChEAr$]

After mulling over

John's excellent response, even pinpointing the "transitional" year, 1993, I'm wondering now,
if IRS in house counsel didn't suggest or dictate the change; in fact, whether or not there might have been a court case challenging their max of 25% of the balance?

After all, a legal beagle might have argued that an extension "form" is not THE return, so how
could such a failure to file a RETURN be imposed? interesting.....

[Black Bart]

This makes

...I'm a little afraid of all zeros for the reasons demonstrated above. If the taxpayer intends to only make a partial payment with the 4868, then I tend to think that overestimating the tax liability is the safest way to go. There's no downside to estimating the tax liability high, since the final return is going to govern the actual numbers anyhow and since we know the extension will be accepted no matter how far apart the estimate and the actual payment are. And if there is an audit, the taxpayer would be less likely to be accused of providing an unreasonable estimate with the initial extension request if their final tax liability is lower then the estimated amount..

sense alright because, as you say, it seems there's no downside to overestimating liability and it doesn't cost anything to put down something in all cases (and thanks for the tip).

It does, however, make you wonder why IRS even wants an estimate. Since they aren't assessing penalties for it 99% of the time, the figure is essentially meaningless. Could it possibly be sort of a red herring to glean information for a different purpose? Maybe a figure that would somehow be a factor in the DIF scoring for audit-worthy returns?

[JohnH]

Could be, but I suspect they are just stacking the deck against the taxpayer. Having the taxpayer provide an estimate under these rules essentially gives the auditor a significant amount of leeway if the estimate is wildly inaccurate, or if it doesn't conform to facts which were clearly knowable at the time the estimate was provided. (For example, if there were W-2 forms and the estimate failed to show an estimated tax liability of at least the amount that would be due based on the prior year's itemized deductions, or even a technicality such as tax having been withheld but there were no withholdings reported on the 4868).

Missing K-1's or unresolved gains/losses on Schedule D which would materially affect the outcome might be excusable, but significant net self-employment income on the final return might cause the return to fail the test, especially if an estimate was extremely low just because the taxpayer hadn't gotten around to adding up his income and expenses. And if there were 1099 forms on hand comprising most of the gross then that could be a factor weighing against the taxpayer. I'm just grabbing at examples here, but the picture seems clear.

The fact that they haven't invoked the rule very often in the past does not preclude them from doing so in the future. And given the current trend toward assessing penalties as a means of raising revenue, I'd be on the lookout for changes in how they approach this going forward. It won't prevent me from filing extensions in the future because it spreads my workload out and enables me to prepare more returns without burning myself out, but I do put a little thought into them and I'm careful to explain the rules to the client (including the caution that there are no guarantees).

[Black Bart]

Hmm...

...The fact that they haven't invoked the rule very often in the past does not preclude them from doing so in the future. And given the current trend toward assessing penalties as a means of raising revenue, I'd be on the lookout for changes...

food for thought. They are indeed into revenue-raising with pen & interest and the law does exist. I might better shape up and amend my devil-may-care attitude as it would be just like them to suddenly drop the hammer on a lax practice.

Still, the current negligible effect policy was in place long before Everson took the helm and began running his tight ship. While I don't put much stock in conspiracy theories (I can't think of a DIF angle that really makes sense), perhaps saving bureaucratic face is/was a possibility. I know of one instance (at least I think it might have been). Trying to abate a substantial 1040 penalty, I asked a Taxpayer Advocate about IRS's one-time late filing forgiveness policy. For good-pay first offenders only, he said; my guy's spotty file/pay history didn't measure up. While we later prevailed on (I'm assuming) medical hardship; funny thing was, the IRS letter stated "This action has been taken based solely on the fact that you have a good history of timely filing and timely paying." And that was absolutely not so. Official IRS policy (not admitting weakness)? Rep's CYA? Clerical ignorance (more likely)? Who knows?

I've beat the subject to death, so I'll quit speculating. Thanks for your comments and the enlightenment.

[Lion]

More Extensions

This is my first year working for myself, new software, etc.; so I have more extensions than I've ever had before. I like it, spreading out my workload. But, it was a hard sell to clients who'd been trained well by the storefronts that they had to file by 15 April and who want those stimulus rebates even though most earn too much money. So, I'm back to work to get everyone filed in May and June, I hope. And, to hopefully show little in the way of penalties and interest that wouldn't have been there even if we filed on time. I took a short vacation with my husband, a school teacher at the end of his spring break. Have a client with a subpoena to show all deposits into her business by her boyfriend who's divorcing; since she's on extension, I have all her 2007 documents and have been faxing the out of town tax attorney for hours. A friend's husband left her, and she suddenly realized how much money he made and wants to track his net worth and is firing everyone she's hired to help and calling and emailing me for advice. I just want to prepare tax returns... Enjoy the off-season, everyone. And, a huge thanks for all your help during the season.