How to assist clients filing a 2018 tax extension
Tax accountants have seen an increase in 2018 tax extension requests compared to the previous year according to an article, “Tax pros report ‘record-setting’ number of extensions” in Accounting Today. The article also reported that the IRS received a record setting amount of 2018 tax extension requests, many of them at the last minute. Overall, approximately 153 million individual tax returns were expected to be filed late.
Why the uptick in extensions?
The Accounting Today article also reported other potential reasons for filers applying for extensions such as required tax paperwork being sent too late to meet the initial April deadline. Unexpected life emergencies, uncertainty about elections, or just more time needed to consider contribution changes to retirement plans were also some causes for tax filers requesting extensions.
Findings from the annual Small Business Accounting1 survey done by the AICPA showed that 32% of accounting firms had difficulty explaining recent tax changes to their clients. Tax consultants in the survey also said that their biggest challenge was effectively applying new tax provisions (most notably Sec. 199A) and ensuring that their existing tax software was delivering correct information. These difficulties may have also led to many taxpayers applying for a 2018 tax extension.
Late tax filing results in penalties
If that October 15 deadline isn’t met, the IRS will add on a penalty of 5% of the amount due for every month or partial month a return is late If your client is ready there’s no need to wait until October to file the return. Filing a late return as soon as possible will lead to lower interest payments. If there is a reasonable explanation for filing late, have your client put that in writing to the IRS if they haven’t already. Check with the IRS for specific details about any extraneous circumstances such as for those who are serving in the military or who have another reasonable cause to need more time to file.
Understanding tax changes
The new qualified business income (QBI) deduction under Section 199A has generated questions regarding its complicated rules. Taxpayers earning domestic income from a qualified trade or business operating as sole proprietorships, partnerships, S corporations, or LLCs may now be eligible for what is often referred to as the new “pass-through deduction”.
Form 8990 was added to calculate the limitation on business interest expense under section 163(j). This update expanded the definition of interest, making it more important than ever to strategically think about deductions.
Further impacts for individual filers included significant changes to tax rates, the removal of personal exemptions, and the removal and limitation of many deductions. Some of the popular deductions that had changes included the state and local tax deduction on Schedule A being limited to $10,000, a removal of the 2% floor additional miscellaneous Schedule A deduction, and the definition of who qualifies for employee business expense reimbursement was also significantly limited.
The IRS also created a new simplified 1040 form with a consolidated set of schedules.
Form changes, even simplifications, can sometimes lead to a higher risk of error, so it’s important to check the accuracy of tax returns, especially for late filers. If you’re using outdated software or even a paper-based system, your firm can lose valuable resources spending extra time reviewing returns. Upgrading to multi-level, customizable software with up-to-date review tools will allow for a streamlined review process.
How can your firm ease the pressure of extension season?
With the largest tax law changes in over 30 years from the Tax Codes and Jobs Act (TCJA) implemented by the IRS in December of 2017, managing tax extension filing is now more prevalent than ever. As your clients’ trusted advisor, make sure to have a resource you can rely on to understand all the tax changes and extension filing rules. Take full advantage of a comprehensive tax research solution – like Checkpoint® from Thomson Reuters to provide accuracy in the face of ongoing changes in regulations for extension season.
Utilizing smart software like Thomson Reuters Checkpoint® helps sift through the constantly changing framework of rules and regulations, eliminating the risk of possible errors. It’s especially important to avoid errors when filing on an extension to avoid penalties and added fees.
To learn more about how to transform your business for late filing season preparedness and beyond visit tax.tr.com/LTPA.
- April Walker, CPA, CGMA, Lead Manager, Busy season roundup — The results are in — Association of International Certified Professional Accountants April 26, 2019