Our hours get longer as we approach the downhill stretch of filing season, and it gets more tempting (if not mandatory) to file an extension for many clients. The proper preparation of an extension involves more than the entering of numbers on the extension form. And, the demands of filing season sometimes take over and quality control procedures and professional standards are overlooked in an effort to get everything filed.
This year will be especially complicated with Affordable Care Act items, a late start with extenders, many late documents from third parties and a culture that expects convenience and increasingly instant results. But the AICPA Code of Conduct, Circular 230, AICPA Statements on Standards for Tax Services (SSTSs) and the Internal Revenue Code (IRC) all still need to be considered in the preparation and filing of extensions for clients. The applicable standards include:
- Circular 230 Sections 10.22, Diligence as to accuracy, and 10.36, Procedures to ensure compliance, mandate considerations to be followed in the preparation of federal returns, including extensions by practitioners.
- AICPA Code of Professional Conduct Rules 1.100, Integrity and Objectivity, and 1.300, General Standards, provide rules for AICPA members to follow.
- SSTSs No. 1, Tax Return Positions, and No. 2, Answers to Questions on Returns, provide more insight into due diligence in the preparation of returns. Also, SSTS No. 4, Use of Estimates, would be applicable for practitioners working with estimated amounts of income and deductions.
- IRC section 6081(a) authorizes the Treasury to allow an extension of time to file for up to six months.
Let us first remember the extension we are filing is the taxpayer’s extension and not our extension. Therefore, the client must be informed that the amounts shown on the extension represents an estimate of their income and the figures are their responsibility. Where possible, assign staff to contact clients as soon as possible. Sufficient time is needed for due diligence and other considerations in order to properly and accurately file an extension.
Further, we are not allowed to file extensions just because clients expect them; we need their explicit permission. Form 8878, IRS e-file Signature Authorization for Form 4868 or Form 2350,is available for this purpose.
In order to stress this point with clients, Gerard Schreiber’s CPA firm communicates in writing with clients after filing March 15 returns and requests written authorization to file an extension of time on their behalf. The letter will also indicate:
- Whether the taxpayer authorizes the firm to file an extension on their behalf;
- All Forms W-2 with tax withheld should be returned with the signed letter;
- Estimated tax payments made should be listed in the space provided;
- This is an extension of time to file and not to pay. Any balances due will incur penalty and interest; and
- If estimated tax payments for the next tax year are required, they should be made.
This may seem a bit too much, but we can never be too careful with this topic. The legal landscape dictates for us to be overly cautious in both return preparation and extension preparation.
We all have seen taxpayers who call and indicate that they are “going through difficult times” or “will owe no tax” and therefore do not need to make any estimated tax payment. These same clients will then show up on October 15 with a Form 1099 or Schedule K-1 for a large amount of income and owe the IRS a significant amount of tax as a result of not making estimated tax payments or a payment on April 15. Some clients are confused or incensed at being assessed interest and penalties. Some clients blame the CPA, but this argument falls flat when the CPA did his or her due diligence.
The IRS has sometimes invalidated an extension due to the use of a bad faith estimate. SeeCrocker v. Commissioner, 92 T.C. 899 (1989) and Oliver v. Commissioner, T.C. Memo. 1997-84 for more on this subject. Besides the IRS, there has been activity in local jurisdictions where CPAs were held liable for extensions filed with bad estimates.
Just some food for thought at this late date. Good luck - we’re almost there.
Gerard Schreiber Jr., CPA, Partner, Schreiber & Schreiber CPAs in Metairie, LA. Gerard specializes in tax, accounting and consulting matters for individuals and small businesses. He serves on the AICPA Tax Practice Responsibilities Committee and has authored numerous courses and articles on various tax subjects.
Valrie Chambers, CPA, PhD, is an Associate Professor of Accounting at Stetson University in Celebration, FL. She has over a decade of public accounting experience as owner/partner-in-charge of a CPA firm in Houston that specialized in advising small business owners. Dr. Chambers has been published in numerous journals and received the Texas Society of CPAs Outstanding Accounting Educator Award for mid-sized Texas universities in 2012. She has volunteered for the AICPA and the IRS’ Volunteer Income Tax Assistance in Corpus Christi.
Form 4668 image via Shutterstock