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Test your knowledge on tax extensions

Shutterstock_145713260March is here, and that means it’s time to talk to your clients about possibly extending their returns. How knowledgeable are you about extensions?

Find out with this short quiz:

#1: True or false: An extension of time to file means that the tax isn’t due until the return is filed.

False.

An extension extends the time to file, but not the time to pay. If an extension is filed but taxes are ultimately owed, there will be interest and penalties charged each month that the balance isn’t paid.

Help clients understand it’s in their best interest to pay as much as possible by April 15. Check out the AICPA Tax Section’s penalties guide for more information.    

#2: True or false: Extending a return makes it more likely to be audited by the IRS.

False.

This is a myth. Explain to clients that the IRS’s audit selection process is based on what is included (or not included) on the return, not when it’s filed.

Furthermore, a rushed-through return is more likely to contain mistakes. An error-riddled return — or one that’s intentionally missing information — is far more of a red flag than a carefully prepared and reviewed return that’s filed by the extended due date.

#3: Based on IRS-provided filing season statistics for 2018, what is the percentage of individual returns filed by April 15th?

  1. 80% b) 85%              c) 90%              d) 95%

D – 95%.

While this may seem high, it doesn’t mean there aren’t good reasons to speak with clients about why an extension might be in their best interest. For example, there may be business returns that won’t be completed in time. Or a client may be eligible to make a self-employed individual retirement account (SEP IRA) contribution to reduce their tax liability, but lacks the immediate cash flow to fund the account before April 15.

These conversations are best held well in advance of the final deadline crunch.

#4: Based on IRS-provided filing season statistics for 2018, what is the percentage of total tax liability on returns filed by April 15th in comparison to the total liability for all returns?

  1. 75%             b) 82%              c) 93%              d) 65%

B – 82%.

Extended returns are typically more complex, and more complex returns usually have higher tax liabilities. This explains why the percentage of tax liability filed on April 15th in comparison to returns actually filed is lower.

#5: True or false: Extending a tax return will result in higher professional fees.

False…generally. But for some clients, it may appear to be true.

To alleviate this concern, clearly communicate with your clients about your billing procedures. And from a workload management viewpoint, make sure additional time is not spent on the return simply because it’s being “picked up and put down” several times.

#6: In a May 2019 survey by the AICPA Tax Section, how many of our survey respondents said that they filed more extensions in the 2019 filing season than in the prior year?

  1. 75%             b) 55%             c) 25%              d) 10%

B – 55%.

More than half of our survey respondents indicated they filed more extensions in the 2019 tax season than in the previous year. This was largely due to the Tax Cuts and Jobs Act legislation, and delayed guidance related to it.

You may have had clients who had never filed an extension before. Hopefully, it was a positive experience and you can discuss whether it makes sense to continue filing an extension.    

#7: How many states/districts require a separate extension form to be filed (even if no payment is due)?

  1. 0 b) 2      c) 4       d) 5

C – 4 (Delaware, District of Columbia, Vermont and New York).

Most states accept either the federal extension or allow an automatic extension to file, if no payment is due. Find more information on state requirements from the State Tax Guide for Individuals, a resource available to Tax Section members.

#8: True or false: If a client is extending their return, it makes sense for them to wait to send you their information.

False.

Make sure your clients understand the importance of delivering their information as soon as possible —preferably organized, and not one page at a time (if you haven’t had a client do this yet, count yourself lucky).

Add information in your client organizer to address this issue. Explain why the timely delivery of all materials will benefit them. For example, the client will get more advance notice on whether they need to make a payment on April 15.

How did you do?

Give yourself one point for every correct answer.

1 point = Might need to think about night school.

2-4 points = Maybe next year?

5-6 points = Mediocrity is for the birds.

7 points = So close, but we all can’t be perfect.

8 points = You’re a tax season rockstar!

Parting thoughts

Filing extensions for clients certainly helps smooth the workload. Be sure that you have established good procedures with your staff and clients related to deadlines and extensions.

For clients who are unsure about an extension, ease their minds by sending them the handy FAQs in the Tax Practitioner’s Marketing Toolkit.

April Walker, CPA, CGMA, Lead Manager – Tax Practice & Ethics, Association of International Certified Professional Accountants

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