Tax Filing Extension Precautions

Posted by Lee Reams Sr. on

Many practitioners take filing extensions far too lightly and are unaware of, or ignore, the nuances of properly completing an extension and the potential penalties. Properly and timely filing Form 4868 extends the individual income tax return filing due date for a calendar-year filer to October 15 (or the next business day if October 15 falls on a weekend or holiday) and avoids the 5% per month (or part of a month) failure-to-file penalty. The penalty is based upon the balance of the tax on the return and not paid by the return due date. The maximum penalty is 25%. 

Properly Estimate the Tax Liability – First and foremost, the 4868 instructions clearly indicate that to have a valid extension, a taxpayer must:

(1) Properly estimate their tax liability using the information available to them, and

(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.  

This requirement was recently reinforced in Tax Court (Laidlaw v. Commissioner) where the court determined the extension was invalid because the taxpayer (through their tax preparer) did not make a bona fide and reasonable estimate of their tax liability or attempt to secure the information necessary to complete a valid estimate.

Proof of Filing – Proof of filing was also an issue in the Tax Court case mentioned above. Neither the taxpayer nor his tax preparer had proof of mailing documentation, so even if a proper estimate of liability had been completed, the extension would have been denied.  

Payment Required With Extension – Years ago, it’s not true anymore, the amount of the estimated tax due had to be submitted with the extension and the extension had to be signed in order for the extension to be valid.  This is no longer true; the current 4868 has no signature field and to quote the 4868 instructions: “If you find you can’t pay the amount shown on line 6, you can still get the extension. But you should pay as much as you can to limit the amount of interest you’ll owe.” 

Late Payment Penalty – Even though an extension is filed, if there is a balance due on the tax return the taxpayer will still be subject to a late payment penalty of ½ percent per month, or part of a month, after the original April due date until the tax is fully paid. Extension Form 4868 includes a payment provision for those who have the ability to pay all or some portion of the estimated balance due. This penalty doesn't apply during the automatic 6-month extension of time to file period if at least 90% of the actual tax liability is paid on or before the April due date of the return and the balance is paid when the return is filed.