The Value of an Extension without Payment

[carolynm]

I was just wondering if there is a value to filing an extension without payment? Each year I file a lot of zero extensions ie zero tax liability, zero payments made. Is there any point to this? Then there are those who owe but don't pay. I think there is value to the latter but not the former.

I was up late last night filing a bunch of these and was wondering if I really was wasting my time.

[Terry D EA]

The only value in filing an extension with out a payment would be the elimination of the failure to file penalty. The interest still continues and the tax is due on the 15th.

Terry D.

[mcb39]

I have already had a client receive a small late filing penalty even though she had a refund coming. I think it was $25 or $29. Since then, I file an extension for anyone who is not ready even if they have not shown up,; but I am sure that they will.

[David1980]

Failure to file is something like 5% of the tax liability per month maxing out at 25%. Failure to pay is more like 0.5%. So you avoid the big penalty and only pay the small failure to pay penalty.

[joelgilb]

Failure to file is something like 5% of the tax liability per month maxing out at 25%. Failure to pay is more like 0.5%. So you avoid the big penalty and only pay the small failure to pay penalty.

This is true only if the extension amount not unreasonable. If the taxpayer clearly knew they owed a large amount and just want to slow IRS down and IRS could prove (and I have seen this) your extension estimate was not reasonable, they could still hit you with the failure to file penalty.

Just doesn't happen too often.

[JohnH]

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.

[joelgilb]

John Nailed It!

There was a previous discussion here on this same issue. Same analysis too.

[Bart]

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.

This is where I wish we had a same as last year button.