JohnH

Ask her if she wants to stay in business long term, or if the prospect of being in trouble with the IRS for years to come seems especially appealing to her. I wouldn't prepare a return like that even if I had in in WRITING from the IRS that it was OK to do so, which I'll guarantee you she doesn't have and can't get.

Wow, next thing you know there will be preparers out there encouraging people to claim EIC's they aren't entitled to...

Yes, no disagreeement on that point. But the fact is that the failure to pay penalty is relatively mild, especially for someone who doesn't have the money to pay at tax filing time. Obviously if they can afford to pay then it's foolish not to do so, but for taxpayers who don't have the funds available for whatever reason, I prefer to give them clear information on the issue rather than to repeat the IRS scare tactic. As I see it, IRS does a pretty good job of keeping them in a panic - my job is to give them facts so they can make intelligent decisions. I tell them the combination of the interest plus FTP penalty is the equivalent of borrowing the money at a 13 - 14% APR. Not exactly HELOC rates, but less that standard credit card rates. There's no loan application process or possibility of being turned down,the debt won't ding their credit score (provided they don't let it get to the point that a lien is filed), and they will still have any existing lines of credit open & available if needed for emergencies. Some of those positives are worth a point or two premium on short-tem financing, especially in these uncertain times. For someone facing that situation, this sort of knowledge is very useful and helps them to make more informed choices. In the current environment I suspect the true net cost will turn out to be even lower in the coming months. First of all, the interest rate will likely adjust downward because the Federal Short Term Rate is down. Secondly, there are strong signals that the IRS is seriously modifying its collection practices and I think it could become much easier to obtain abatement of some penalties in the near future, especially for first-time delinquents. One example of how it could work is something along the lines of the policy followed by the state of NC. If a taxpayer is otherwise compliant, they can obtain forgiveness of 100% of a first penalty and 50% of a second penalty. This option can only be exercised once every 3 years, but it's available with virtually no other restrictions by simply filling out a one-page form.

The question is an interesting one, so I'll share my own experience. Many years ago I was asked to review an audit report for a real estate agent. The extension and return had been filed by someone else. They had filed an extension request with all zeros, but the return itself showed a tax liability - I don't remember the amount but it was $5K or more. They had filed the return before Oct 15 of the same year - within the extension period. The audit had turned up another couple of thousand in tax - not unexpected for the real estate agent taxpayer. The interesting thing about the report was that the IRS had assessed a 25% Failure to File penalty on the full amount of tax shown on the return plus the audit changes. The reason given was that the taxpayer failed to properly estimate the tax liability when the extension was originally filed, so the extension was invalid. In other words, this guy cost himself $1,750 by putting all zeros on the extension request when all he had to was was put a few thousand on the "Estimate of Tax Liability" line, even if he paid nothing with the extension. In over 25 years of tax preparation, that's the only time I've ever seen an extension retroactively denied, even though I've seen hundreds of extensions filed by others with all zeros. My conclusion is that the extension request with all zeros is better than nothing and will generally work, but it's seriously flawed. The instructions clearly say that the tax liability must be properly estimated, so an extension request with all zeros generally would not meet that standard, but there's not a mechanism to make that determination on routine filings. However, if the return is audited then the extension without a reasonable estimate of tax liability is subject to be denied after the fact. My approach is to always find a reason to enter an estimated tax liability on the extension request. If nothing else is available, I use last year's tax liability. Even if the client can't pay, won't pay, etc, I still set the estimate on the high side based on whatever information I have, because there's no downside to filing without full or partial payment (with respect to approval of the extension and avoidance of the 5% FTF penalty). I'll even ignore information that may reduce the tax liability when working up the estimate. So I never file an extension request with all zeros unless I'm certain that's the case, and in those situations it's nothing but a "feel good" exercise.

I think the anchor was technically wrong but corret in practice. It all hinges upon what one means by "Extension of Time to Pay". If one means that the IRS is giving people a little extra time to pay with no consequences, then it definitely it not an extension of time to pay. But if one means that IRS is allowing the taxpayer to acknowledge that they owe, that they can't pay right now, and that they intend to pay later (along with interest and a very small FTP penalty), then the 4868 does constitute both an extension of time to file and an extension of time to pay. The instructions on the 4868 acknowledge that fact when they make it very clear that the extension will be valid even if the taxpayer doesn't pay the full amount owed. I think IRS is very crafty with their extension policy. They proclaim loudly that the extension is not an extension of time to pay, then they directly contradict themselves by allowing people to acknowledge that they owe but they are not paying. The validity of the extension had much to do with a proper estimate, but absolutely nothing to do with whether it's accompained by payment. This has the practical effect of getting taxpayers to acknowledge the liabiilty and then giving them several months to begin crafting a plan to deal with it.

No, the way the extensions are filed doesn't commit them to anything. I just like to do separate extensions when there's ambiguity about how the final returns will be filed. It makes for easier back-tracking if an issue comes up later and you're trying to prove the extension was valid. (Plus, if they do ultimately file MFS, you can give each one of them a copy of their own extension without the other one's info folded into the withholding numbers.)

So I had all my extensions finished yesterday. As planned, today has been mostly about 1st Quarter payroll reports and double-checking on the extensions. Well, except for one little twist: When I came into the office this morning I found a W-2 & 1099-R on my fax. It's from someone who called me about a month ago asking about my charges and some other info. I emailed her my worksheet and contact info at the time, but just assumed she had found someone else in the interim. I plugged the info into the software and learned she will owe about $12K state & Fed. (She's in the middle of a separation, 3 small kids at home, decent income, but didn't bother to have much tax withheld on that $50K IRA she inherited and promptly spent) Naturally she was a little upset when I called her, especially since she doesn't have the money to pay. I gave her the options and told her we'd need to file the extension to get the FTF penalty off the table. I also asked if she & hubby had considered MFJ. His income was sort of low last year, which was part of the reason for spending the IRA money, along with the fact that much of it went to pay off his credit cards. She initially said "No way", but after I explained how it all works, she said she'd contact him. I got her permission to talk with him about her info, and urged her to have him call me. Hubby calls later, more than a little bit suspicious of me, especially when I explained that if she itemizes he will have to do the same on a MFS return, and he has almost no deductions. He didn't know this and just assumed he could file any way he wants and use the Std deduction. He assumed he had a refund and wasn't even planning to do anything about it today since somebody told him there's no penalty if you have a refund. He volunteers that he earned about $20K and only had $400 withheld. So now he's upset as well - not at me but at the IRS. So at least we're making progress. I'm thinking they might be able to save $3K - $4K combined on a MFJ return if some of my assumptions are right. After I explain all the pros & cons of MFJ vs MFS, etc (and maybe HOH for her - not sure about that one yet) - I dropped the bomb on him. "It sure would be a shame for the IRS to get that $2K - $3K when it would be much better spent on your kids." (I now, it's a shameless attempt at guilt, but it's also true folks). A few more phone calls go back & forth between them, and he finally calls back and asks me what's the best thing to do. I tell him I need to prepare an extension for him as well, we can get all our ducks in a row, and sort all this out a few weeks from now after they've given me all sorts of written permission to discuss the situation with one another, their lawyers, the IRS, my wife, you guys, and anybody else I choose to enlist if I need help. I point out that the separate extensions will preserve their right to file MFS if that's what they finally decide, but it also gives us the flexibility to file MFJ. In any case there will be no FTF penalty. I know it's a bad idea to get in the middle of these domestic situations and I usually shy away form them. And I don't fancy myself to be a marital counselor. But thanks to today being not so busy, plus the fact that those 3 kids are about the ages of my 3 grandsons, I just had to step up to the plate & do what I could. So their extensions are in the mail and I feel good about maybe having helped someone in a special way today. Nobody but my freinds on this forum could know or care about the financial train wreck that may have been avoided today by a few phone calls back & forth, but that's OK. Hopefully I won't be back here in a few weeks whining about no good deed going unpunished. Now I'm going to take my wife out to dinner & enjoy the evening. Hope all of you had a profitable tax season and if you're exhausted, please get some rest. (I may need to pick your brain in the next couple of weeks)

The last time I remember hearing about this was many years ago, and my memory on this may be fuzzy. The rationale was based on how returns are selected for routine audit. The reasoning ran along the lines that returns filed in Oct wind up going into the audit batch for the upcoming year. Assuming that incomes & deductions are increasing each year due to inflation, then the DIF score cutoff point for routine audits for a given year would gradually creep up. Therefore, your probability of being selected for audit would be slightly lower because your prior-year's numbers were being compared against the succeeding year's averages. Naturally, if the return had issues that stood out significantly or if the return were one of those selected at random, then that reasoning would fly out the window. But for the average return the argument certainly made some sense. I just don't know if it was based on fact or just another rationalization. Whatever the case, my experience tells me that extensions have no effect whatsoever in INCREASING the chances of an audit. And if I were making decisions on this issue, I'd put a high priority on selecting returns filed during Apr 14 - 15. Those are the returns filed by tax pros and individuals alike under deadline pressure and oftentimes in panic mode. I suspect the error rate on those returns is many times the rate on returns filed earlier or later.

The only thing I'd give him is an extension form in order to allow him time to get someone else to prepare the return.

Watch out here Bart. Keep telling me stuff like that and next thing you know I'll be considering e-flinging next year.

This sounds like a rumor invented by the same guy who calls up once or twice during tax season just to say "I'm getting my stuff together."

I don't bash clients who procrastinate - I consider them some of my best clients. After all, they're a source of continuing revenue long after the silliness & phony hype of Apr 15 is over.

So what's the change? I'd sure hate to re-file every one of the 74 extensions I've sent in over the past few weeks.

Since I'm starting on First Quarter payroll reports today, I'm posting this as a reminder to myself as much as to anyone else. I allowed a couple of Forms 941 to get out the door in the 4th Quarter of 2008 unsigned. Probably didn't matter much at that time, but I'm sure IRS will be taking a closer look at the Paid Preparer section this time around.

My personal return is definitely on extension. No way I'd prepare a return that's important to me under deadline pressure - too many opportunities to make a mistake.

Well, in spite of what IRS says, from a practical standpoint it really is an extension of time to pay as well. All that is necessary is that the taxpayer needs to recognize there's a moderately high interest rate associated with the extension.

How to do the return with missing info? I'd start with a Form 4868.

You could attach separate Schedule C's and SE's to the 1040X with an explanatory note in the appropriate section. That should take care of it. The 1040X instructions say to attach any schedules which show changes.

Wrapping up a few minor extensions today, including my own. Will spend the morning of the 15th reviewing all extensions and making a few reminder phone calls & emails, then leaving early to take my wife to dinner. Looking forward to that most of all.

Somebody probably promoted it to her as a great way to save money by taking "tax losses". Lots of these direct sales and MLM schemes play on that idea and people are gullible enough to fall for it.

What about inventory at year-end? Just because she bought it doesn't mean she sold it.

Any bets on which way Tax Freedom Day will move in the coming years? I'm thinking it could eventually be around July 1.

I love procrastinators, as long as they're cooperative. They help support an income stream after Apr 15 - revenue I wouldn't have if not for them. Not a bad deal, especially right now with so many people being out of work. I've thanked every one of them whom I've heard from in the past week or so.

How true! It's amazing how many people have been getting grapes stuck up their nose lately. Thanks for reminding us of this important issue, Mary.

Response to repeated calls asking: "How's it coming with my tax return?" "Sorry, but every time you call I pull it out to look at it and then it goes back to the bottom of the stack. Guess we'll have to go ahead & file that extension now."