Discussion:Urban legend? Denial of extension for inappropriate estimate

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Discussion Forum Index --> Basic Tax Questions --> Urban legend? Denial of extension for inappropriate estimate


Discussion Forum Index --> Tax Questions --> Urban legend? Denial of extension for inappropriate estimate

Wiles (talk|edits) said:

16 April 2011
Another tax professional was telling me that if the client wants to go on extension but gives him nothing, he just e-files the Form 4868 with zeroes.

I always make a half-hearted attempt to at least show something, even it is SALY rounded to the nearest hundred. I have always been under the impression that IRS could deny an extension if there was no attempt made for an appropriate estimate.

Has anybody out there ever had a Form 4868 Individual Extension get denied because there was not an appropriate estimate made?

KathiJud (talk|edits) said:

17 April 2011
Nope and we have filed them with zeroes when no other info is known for 30 years.

Marcilio (talk|edits) said:

17 April 2011
Nope. Sometimes missed the real numbers by a mile. Back in the bad old days, when the taxpayer had to sign the extension forms under penalty of perjury, and you couldn't file an extension if the taxpayer owed money but didn't pay, there was a ton of lying to show a zero balance due even though everyone knew it was a lie.

Some of the onus of that situation may still be lingering.

Jake (talk|edits) said:

17 April 2011
But what really happens when the taxpayers tax is $15,000 and only $9,000 was paid by April 15th? Do they sock a 5% per month penalty on the $6,000 that was not paid until 10-15, or just the late fee of about 0.5% a month.

Marcilio (talk|edits) said:

17 April 2011
Just the 0.5% penalty plus interest at 3% per annum.

Death&Taxes (talk|edits) said:

17 April 2011
Reg. 1.6081-4(a)(4) does say "(4) show on the application the full amount properly estimated as tax for the tax year."

Maybe it is rarely enforced, but would you like to be the one who has the turn in the barrel?

Marcilio (talk|edits) said:

17 April 2011
I love that joke.

Jake (talk|edits) said:

17 April 2011
Marcilio - I thought the 0.5% penalty was the interest (actually now what, 0.333% a month). They call that the "underpayment of tax penalty". I was talking about the 5% per month non-payment penalty that maximizes out at 30% or so.

Harry Boscoe (talk|edits) said:

17 April 2011
Jake: The 0.5%-per-month-or-part-thereof penalty is not the interest and the 5%-per-month-or-part-thereof penalty is not the interest, either. There are three things here, and I don't have enough beer in the fridge to give with the complete explanation right now. I think there's surely a website, maybe even irs.gov that gives a thorough and well-vetted explanation of your choices among these onuses (onii?).

Short answer: File the request for extension and you'll avoid the *painful* 5% per month. The other, smaller, penalty and the interest, you're pretty much stuck with.

Kbairtax (talk|edits) said:

17 April 2011
I have heard of extensions being denied for not making a reasonable estimation of tax and paying it with the extension. I think this can apply when you have a delinquent taxpayer and they are already on the IRS radar.

My only first hand experience is with NY. Client owes a ton for 2008 due to a prior preparer mistake. 2009 is not yet filed and 2010 is going on extension as well. NY state collections officer told me flat out that the 09 extension was invalid.

I have filed almost all my extensions over the last 8 years with zeros. No issues. There is a rule, but I don't believe it is enforced. The instructions for the 4868 should have it spelled out.

MilTaxEA (talk|edits) said:

17 April 2011
From the front page of Form 4868:
Qualifying for the Extension
To get the extra time you must:
  1. Properly estimate your 2010 tax liability using the information available to you,
  2. Enter your total tax liability on line 4 of Form 4868, and
  3. File Form 4868 by the regular due date of your return.

How could they spell it out any more clearly?

Tax Writer (talk|edits) said:

17 April 2011
I always file extensions with zeros. I can't "reasonably" estimate tax liability without doing the damn return. Or at least having paperwork in front of me.

AEM CPA (talk|edits) said:

17 April 2011
Hence "using the information available to you". If that's nothing, it's nothing.

CathysTaxes (talk|edits) said:

17 April 2011
I don't think any of my filed extensions had anything other than zeros. I tell the clients that it is an extension to file, and not an extension to pay, and they still don't give me anything.

Ckenefick (talk|edits) said:

17 April 2011
I completely agree with Death&Taxes on this one. 1,000,000%. If you don't believe this is the law, or believe it but don't comply with it, I suggest you review some of the cases on this issue. And here's the correct reg - Reg ยง 1.6081-4(b)(4). You might also want to read the preamble to these regs. One commentator suggested that they drop the "properly estimate your tax" requirement. IRS said "no thanks."

I have had an extension denied in the past for this reason. But this was in the old days, before the law changed in 1996. In 1996, the rule was removed that required the taxpayer to pay in full, with the extension, what he thought he'd owe.

It does seem like a growing trend in the states, though, that you don't even need to file an extension if you'll not be making an extension payment.

Joanmcq (talk|edits) said:

17 April 2011
Long term clients I've estimated based on prior years if I have nothing, but one of the reasons I'm taking so long is that with my RDP returns, I have no idea how the return will pan out until I at least have some of the numbers in, and not only for CA, but the split federal returns too. If they owe, I want to give them a chance to pay. If they say no, ok. But, for example, my last one wants to kick in at least a partial payment to offset some of the penalties.

Lizzit (talk|edits) said:

17 April 2011
It would always happen to a few taxpayers every year at my old job stateside, but since I moved abroad 12 years ago it hasn't happened to any of my clients.

Death&Taxes (talk|edits) said:

17 April 2011
If I have any information, I start the return by at least putting wages and withholding on it, and tell people I want their W-2s, or ask them if they paid their estimates. And if I feel they might owe, I override the tax on the 4868 to produce a balance due. I think the -0- extension goes back to the days when if a balance was due, IRS would deny the extension because the money was not remitted.

Ckenefick (talk|edits) said:

17 April 2011
As an FYI -

If you read the cases, and a taxpayer says, "Well, I didn't have all of my 1099's or I'm missing some bank statements." The judge says, "Then you should have asked again for them, or gone by your own records, or figured it out in some other way." The courts are very unwilling to listen to these silly arguments. If a taxpayer "could have" obtained the information, then the courts say you "should have" obtained the information. Granted, a missing K1 from a master limited partnership would probably be an exception.

Fsteincpa (talk|edits) said:

17 April 2011
If I'm waiting on information and it's a larger client where these things need to be estimated, I'm doing this work in November and December. I am not waiting til I am knee deep in returns in April to think about it.

Bottom line is to tell the client that there is a possibility that the extension may/can be denied. Let them also know that it has/has never happened to any of the clients you have dealt with. Let them know that it is a minor possibility.

After explaining to the client, recommend that the client pay more than what they believe it possibly could be and then they can apply the refund to their following years estimates, or take a refund. If not, let the client beware.

It's not up to us to fret because the clients wish to roll the dice.

Trillium (talk|edits) said:

17 April 2011
Good cites, historical info, and more anecdotes in these discussions: Discussion:Is extension nullified if taxpayer misses extended due date?, Discussion:Form 4868 Tax Liability. While the OP had probably already read those, they might be interesting for others to see.

TaxDoug (talk|edits) said:

18 April 2011
Watch out for some state extensions. New Jersey requires your extension payment to be at least 80% of actual tax on the extended return. I have a client that received a denial of their extension and assessment of a late filing penalty and interest from the original due date. The extension we prepared covered 78% of the final NJ tax liability. We requested abatement and received it, but what a hassle.

UpstateCPA (talk|edits) said:

18 April 2011
I had a NY S-corp extension held to be invalid b/c the payment with the extension was not enough. They assessed late filing penalties when the return was filed less than a month later.

Irsfixer (talk|edits) said:

18 April 2011
Three years ago we started educating clients about the "possibility" of zero/zero/zero extensions being declared null and void. This year, there were only two such extensions. One was actually zero/zero/zero and the other was for a client of 31 years who had extenuating circumstances. For more than 85% of clients, we received almost all of information needed to do a complete return, except for the fact the information was received in the last two weeks.

Wiles (talk|edits) said:

14 April 2014
It's been 3 years. I thought I would revive this thread to see if anybody out there has yet to experience an extension nullified due to an improper estimate.

Ckenefick (talk|edits) said:

14 April 2014
What if someone were to say, "Yes," had a situation where a guy pissed off the auditor big time, so auditor nullified his self-prepared extension that had zeroes all over it. What would your reaction be to that?

Doug M (talk|edits) said:

14 April 2014
Years ago, yes. This is from the 70's and 80's and early 90's. This follows up on Chris' thread.

Going into the memory bank. Extensions used to have to be signed by the taxpayers. You listed the same 4 items on the extension. Tax liability, payments, balance due, how much are you paying.

If you did not have 90% of your tax liability paid by 4-15, your extension was denied. Automatic. The honest folks who filled out their extension accurately, had their extension denied.

The dishonest bunch that said, nope, don't owe anything, list the liability = to whatever payments have been made, got their extension approved.

Doug M (talk|edits) said:

15 April 2014
I guess I never completed my thought process.

Have the rules changed? Did Congress act? Did the IRS decide they were punishing people for lack of funds in a very harsh manner? Did the IRS have authority to deny an extension since 90% threshold was not met?

Fsteincpa (talk|edits) said:

15 April 2014
I've actually seen NY invalidate an extension because payment was not made. It might be for a business entity though not individual.

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