The 4868 Automatic Extension form includes Part II where the amount of the year’s tax liability is determined.
Part II Individual Income Tax
4. Estimate of total tax liability for 2017……. $ ________
5. Total 2017 payments …..….....………………… ________
6. Balance Due. Subtract line 5 from line 4 .. ________
7. Amount you’re paying ……….....…………..….. ________
According to the 4868 instructions, to qualify for an extension, a taxpayer must (1) properly estimate their tax liability using the information available to them, (2) enter their total tax liability on line 4 of the 4868 and (3) file the extension by the regular due date for their return.
However it is not uncommon to see Forms 4868 filed with only zeros entered on lines 4, 5 and 6. Practitioners should be aware that doing so risks the IRS taking the position that the Form 4868 was not properly completed, therefore making the extension invalid.
In a recent Tax Court case (Laidlaw v. Commissioner) the taxpayer contended that their tax preparer had filed valid extensions for them. The IRS on the other hand claimed never to have received an extension, and the copy of the extension provided as evidence in court was invalid because the taxpayer (through their tax preparer) did not make a bona fide and reasonable estimate of their tax liabilities or attempt to secure the information necessary to complete a valid estimate. The court ultimately determined there was no evidence to prove an extension was actually filed and, therefore, did not address the issue of whether the 4868 was invalid because no reasonable estimate of tax liability was made.
However, there are two important lessons to be learned here…
Proof of Filing: The tax preparer had no proof of mailing, and often mailed multiple extension forms in one envelope but did not contemporaneously document his mailings. What records do you keep to prove extensions were mailed?
Bona Fide and Reasonable Estimate of Tax Liability: In this case the preparer simply entered zero as the tax liability. However Reg. Sec. 1.6081-4(b)(4) specifically requires the 4868 to “show the full amount properly estimated as tax for the taxable year” in order for the extension to be valid. There are all sorts of ways to comply with this requirement. If you are only missing one or two items of income you can make a reasonable guess at the numbers and use your tax software to do the tax estimation; if you have no data at all you can use the prior year’s info and adjust he current year for inflation, change in circumstances, etc. The end result may well be zero tax, but until you’ve worked the numbers and documented your efforts, you won’t be able to justify entering a zero if challenged by IRS. There is no one specific method required; however, there is the requirement to “properly estimate the tax for the year.” Are you complying with those regulations?