It’s that time again… Tax Day (May 17th this year, aka my birthday) is upon us and it’s the end of what is certainly one of — if not the — roughest tax seasons in history. Millions of taxpayers will need to have their returns extended for various reasons. What does this mean? The AICPA has released a “Tax Extension FAQ” for CPA members to share with their clients.

What does filing an “extension” do?

• An extension is a form filed with the IRS to request additional time to file your federal tax return. This extends the due date for submitting your individual return to October 15. In some states, filing an extension with the IRS will automatically extend the time to complete a state income tax return.
• Filing an extension grants you additional time to submit your complete and accurate return, but you still need to estimate whether you will owe any taxes and pay that estimated balance by the original due date.
• Extending your return allows you and your CPA more time to prepare your tax return to ensure the filing of an accurate tax return. In many cases, you may still be waiting for additional information (e.g., Schedules K-1, corrected Forms 1099, etc.) to complete your return.

Why does my CPA suggest we extend my tax return?

• If your CPA has recommended that you file an extension, it may be due to many reasons, such as:
– The volume of data or complexity of certain transactions (e.g., sale of a rental property) on your return requires additional time.
– The amount of time remaining in filing season is limited for the CPA to complete client returns by the due date* due to late-arriving information.
– My note: this year exacerbated the situation by requiring small business CPAs to simultaneously navigate the Restaurant Relief Fund (RRF), PPP1 Forgiveness, and 2020 Employee Retention Credit.
• Many CPAs have a “cutoff” or deadline for clients submitting their tax information so they can plan their workload to ensure all client returns and extensions are completed by the due date.*
• Your CPA may suggest filing an extension if there are aspects of your return affected by pending guidance or legislation.
My note: this is the case for many more clients this year than usual; late-changing tax rules delayed the start of tax season, and waiting for guidance has further stretched it thin.

Am I more likely to be audited if I extend?

• Extending will NOT increase your likelihood of being audited by the IRS.
• It is better to file an extension than to file a return that is incomplete or that you have not had time to carefully review before signing.

What are the primary benefits of extending my tax return?

• It provides for additional time to file returns without penalty when you are waiting for missing information or tax documents (such as corrected Forms 1099). Just remember that an extension provides additional time to file, but no additional time to pay. Penalties may be assessed if sufficient payment is not remitted with the extension.
• You may qualify for additional retirement planning opportunities or additional time to fund certain types of retirement plans (e.g., SEP IRA).
• It is often less expensive (and easier) to file an extension rather than rushing and possibly needing to amend your return later.

Should I do anything differently if I am filing an extension or “going on extension?”

• No, you still should give your CPA whatever information you have as early as possible or as soon as it becomes available.
• Expect to pay any anticipated taxes owed by the due date.* You still need to submit all available tax information to your CPA promptly so they can determine if you will have a balance due or if you can expect a refund.
• If you are required to make quarterly estimated tax payments, individual first quarter estimated tax payments are due April 15. Your CPA may recommend that you pay the balance due for last year and your first quarter estimated tax payment for this year with your extension.
• If you are anticipating a large refund, your CPA will likely try to get your extended return completed as soon as possible once all tax information is available. Your CPA may also want to discuss tax planning opportunities with you so that, in future years, you don’t give the IRS an interest-free loan.

Have there been any changes to the due dates of returns for this year?

• For tax year 2020, the IRS is postponing the deadline for all individual tax returns.
– Individual returns otherwise due April 15 will not have to be filed until May 17, 2021.
– Certain states have also postponed their filing and/or payment due dates.
• Note that victims of natural disasters may be granted extensions, such as victims of the Texas winter storms have until June 15, 2021 to file various individual and business tax returns and to make payments.

My note: I’d like to add that we take filing extensions for our clients very seriously. We collect as much information as we possibly can about the year’s taxable income and deductions, extrapolate based on information from the prior year, and build a complete tax return — filling in estimates where needed. This way, we get as accurate a picture as we can so as to project how much might be owed to the tax agencies. We do our best, although it’s not perfect, and as a result, much more work is involved in putting together an extension than most folks might think.

More from the IRS on filing extensions here, including a link to file your own for free.

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