Extensions + ES + Balances Due

[Lion EA]

So, after a death in the family and my new Dell being dead most of March, I'm definitely putting some returns on extension now. For those who pay ES (the self-employed) and typically have balances due, should I work up an amount to pay with the extensions AND the April ES payments? Or, dump payments into the extension only and then when the returns are done, apply the resulting refunds to ES payments? Will the latter generate late payment or underpayment P&I on their 2011 returns because the April ES payments don't get funded until the returns are filed over the summer? Or will they be deemed to have been made now when the extension payments that generated the refunds that are applied to ES payments are made? In short, two forms or one?

[Margaret CPA in OH]

I include a predetermined amount that includes balance due plus first quarter estimate plus maybe a little bit more, depending. When the return is prepared (I have, so far, never prepared a balance due return beyond end of May), I indicate on the options the amount exceeding the balance due to be applied sequentially to estimated payments. The balance of the estimates are then on the remaining vouchers. I think the ATX mechanism for this works very well and is easy to manage.

[kcjenkins]

They will treat it as paid when it is actually paid, so no problem if you combine them into one. As long as you remember not to have the resulting 'refund' paid to them! LOL

[grandmabee]

Are you sure? I thought that is the way it used to be then a notice came out saying the estimate will aply on date return filed? Or maybe I am just dreaming. either way that is the way I do it incase we are low on estimate of balance due with return.

[Lion EA]

That's what I'm worried about. This time of year I have my high income people. If I have them put a lump sum in with their extension, meaning to apply the refund to ES when we file, but having their 1Q ES reported on their return file date in, say, June, instead of on their extension paid date before 18 April, it'll really run up the interest they'll owe next year. So, should I generate BOTH the extension forms as well as the 1Q ES voucher for them to send in TWO checks now, well four with the state?

[Margaret CPA in OH]

I just reread the instructions for estimated tax and noted this on page 4: "Enter in the box provided on the estimated tax payment voucher only the amount you are sending in by check or money order. When making payments of estimated tax, be sure to take into account any 2010 overpayment that you choose to credit against your 2011 tax but do not include the overpayment amount in this box." This year I had a client for whom I credited the entire amount against estimated tax. I don't see the problem.

I don't recall seeing any notice described by bcollen but I also don't claim to notice everything. I take the above passage to mean, as I have done for years, that any overpayments reported on the return credited against your estimated taxes will be applied as indicated. If IRS has the money by April 18, there should be no problem. On page 3 it even gives a tip that one can make more than four payments.

[JohnH]

The safest route would be two separate payments. Then if their return is ready before June 15, you can have them reduce the 2nd est tax payment by the amount of the refund on the 2010 return. It's only 2 more months, and if they're filing an extension they're probably not nearly as concerned about all this as you are anyhow. Best to have them overpaid/paid ahead in the short run rather than trying to explain why they incurred an estimated tax penalty next year, because at that time it will be all your fault as far as they are concerned.

[Lion EA]

In a couple of the cases, it is all my fault. With a death in the family, and waiting the entire month of March for Dell to repair my computer, I'm behind and putting clients on extension that would prefer not to be, who have brought me their materials. Now, that includes the partnership that sold a business line and is expecting capital gain treatment now when he treated it as inventory in prior years, so I have some research to do; and the clients missing items. But, I have some unhappy campers as it is. So, I don't want their P&I any higher than it has to be.

What do all of you do? Print both ES vouchers and extensions and compute amounts for your clients to pay? Or, pump of the extension amount to cover ES too?

[JohnH]

Some tax seasons not everything goes as a planned. If I were in your situation I'd tell every one of them that the LAST thing they want is a tired, stressed out, sleep deprived person preparing their returns. THEIR once-a-year tasks just too important for that type of treatment.

Sounds like you need to do a little triage. Even getting extensions in place takes a little time. If you devote some quality time to getting extensions in now on everything you have in house, coupled with an insistence that anything yet to come in automatically goes on extension, you will then be free to complete whichever of the returns most need to be filed by Apr 18. The more relaxed state of mind will free you from the pressures that build up between now and the filing date, and will make you more efficient overall. you may even get more work done than you would have completed just working in reactive mode.

IMO, the objective is to do everything you can to insure that Apr 15 ( or 18) is just another workday around your office. I've followed this pattern for years, and I measure the success of my planning based on whether I'm able to come into the office mid-morning on the 15th, review all my extensions, make a few phone calls to verify that people paid their extension payments, and take my wife out to dinner that evening. Incidentally, that also leaves me free to help out some panicky late comer who had a death in THEIR family or for some other reason hadn't gotten around to getting their return done. (putting them on extension, of course)

[Lion EA]

Thank you, John. I have been working toward your method. This season I'm closer. I just gave one reluctant extender (the biz line sale) my reasoning for needing research time after the rush of tax season to work with her husband and how he treated the purchase and intervening use of that biz asset over the years (15% capital gain vs. 35% ordinary income). Was aiming for Sunday for extensions that I can file via my software &/or calculations re payments by 18 April, and hope to be close to that. Have a part-time assistant who'll come in next week to file some states that need to be done individually on the states' web sites.

Leaning toward separate extension $ amounts and 1Q ES $ amounts to pay by 15 April. After all, have state ES anyway, so may as well have federal ES as well as the extension payment. Email clients the vouchers and extensions and have them mail in with checks?

Thanx for everyone's thoughts. Really helps this sole proprietor.

[michaelmars]

I always include the 1st qtr estimate in the extension, that way when the estimated income used for extension purposes is understated, you are still covered and no penalties. its a great hedge against errors and makes no difference to the cient since the payment is the same. filing separately, the gov't is holding the same money yet if you are facing p&i for 2010 when that 1099 sufaces which you were never told about, or the missing k-1 comes in a few thousand higher.

[Margaret CPA in OH]

Michaelmars, my replies #2and #6 above. It seems so much more practical than separate vouchers and mailings. Diff'rent strokes...