What does filing an “extension” do?

• An extension is a form filed with the IRS to request additional time to file your federal tax return. The extension period is six months, which extends the due date for submitting your final returns from April 15 to Oct. 15.* In some states, filing an extension with the IRS will automatically extend the time to complete a state income tax return.
• Filing an extension grants you additional time to submit your complete and accurate return, but you still need to estimate whether you will owe any taxes and pay that estimated balance by April 15.*
• Extending your return allows you and your CPA more time to prepare your tax return to ensure the filing of an accurate tax return. In many cases, you may still be waiting for additional information (e.g., Schedule K-1, corrected 1099s, etc.) to complete your return.

Why does my CPA suggest we extend my tax return?

• If your CPA has recommended that you file an extension, it may be due to many reasons, such as: - The volume of data or complexity of certain transactions (e.g., sale of a rental property) on your return requires additional time. - The amount of time remaining in filing season is limited for the CPA to complete client returns by April 15* due to late-arriving information.
• Many CPAs have a “cutoff” or deadline for clients submitting their tax information so they can plan their workload to ensure all client returns and extensions are completed by April 15.*
• Your CPA may suggest filing an extension if there are aspects of your return affected by pending guidance or legislation (expiring provisions that could be extended, for example).

Am I more likely to be audited if I extend?

• Extending will NOT increase your likelihood of being audited by the IRS.
• It is better to file an extension rather than to file a return that is incomplete or that you have not had time to review carefully before signing.

What are the primary benefits of extending my tax return?

• It provides for additional time to file returns without penalty when you are waiting for missing information or tax documents (such as corrected 1099s). Just remember that an extension provides additional time to file, but no additional time to pay. Penalties may be assessed if sufficient payment is not remitted with the extension.
• You may qualify for additional retirement planning opportunities or additional time to fund certain types of retirement plans (e.g., SEP IRA).
• It is often less expensive (and easier) to file an extension rather than rushing now, then possibly needing to amend your return later.

Should I do anything differently if I am filing an extension or “going on extension”?

• No, you still should give your CPA whatever information you have as early as possible or as soon as it becomes available.
• Expect to pay any anticipated taxes owed by April 15.* You still need to submit all available tax information to your CPA promptly so they can determine if you will have a balance due or if you can expect a refund.
• If you are required to make quarterly estimated tax payments, your first quarter estimated tax payment is due April 15.* Your CPA may recommend that you pay the balance due for last year and your first quarter estimated tax payment for this year with your extension.
• If you are anticipating a large refund, your CPA will likely try to get your extended return completed as soon as possible once all tax information is available. Your CPA may also want to discuss tax planning opportunities with you so that in future years, you don’t give the IRS an interest-free loan!

Is there anything I can do to avoid filing an extension if I know I am missing some information now?

• If you are anticipating a large refund, your CPA will likely try to get your extended return completed as soon as possible once all tax information is available. Your CPA may also want to discuss tax planning opportunities with you so that in future years, you don’t give the IRS an interest-free loan!

Have there been any changes to the due dates of returns for this year?

• There are no due date changes for the 2020 tax year.
• The earlier due date of March 15 for partnerships/LLCs may increase the likelihood of filing your individual return by the original deadline.

College and Education:

Child and dependent care tax credit — Those going back to school may qualify for the child and dependent care tax credit. This credit allows married couples filing jointly to claim up to $3,000 in child care expenses per qualifying individual (up to $6,000). Married couples claiming the credit must both be working and file jointly. How much a couple can claim depends on their income. Note: A parent must have custody of the child for more than 50% of the year to qualify for this credit. The qualifying child must be under the age of 13 and claimed on the tax return as a dependent.

American Opportunity Tax Credit (AOTC) — Individuals may receive up to a $2,500 credit during the first four years of post-secondary education for an eligible student. The credit is based on qualified tuition and related expenses paid during the tax year. The amount to be refunded cannot exceed 40% of the total credit. Phaseout starts at $80,000 MAGI ($160,000 for married filing jointly), and those with a MAGI above $90,000 ($180,000 for married filing jointly) may not claim the credit.

Lifetime Learning Credit (LLC) — Similar to the AOTC, some students enrolled in eligible educational institutions may receive a credit of 20% of qualified education expenses — up to $2,000 — for themselves or any qualifying dependent they claim on their tax return.

Pell grants — These funds are excluded from income if used for qualified tuition and related expenses.

Scholarships — Scholarships for tuition and fees are nontaxable if they’re used for those purposes. Even if a stipend is used for tuition and related expenses, it’ll be considered taxable income. Qualifying expenses the scholarships cover cannot be used for the AOTC or LLC.

Retirement accounts — IIf allowed by the plan, taxpayers may borrow against their retirement accounts or withdraw funds from them. Depending on the type of plan, distributions may be made without incurring the 10% early-withdrawal penalty. However, distributions from certain retirement plans (e.g., traditional IRAs or 401(k)s) are subject to regular income tax.

Marriage

Investments and property — Couples with investments, property, back child support payments, back taxes or who stand to claim a significant inheritance should consider the unique tax implications of their union.

Same-sex marriage — Same-sex marriage is treated the same as traditional marriage for federal tax purposes. Civil unions and domestic partnerships are not, but state laws may require these couples to file jointly. Be sure to review state guidance.

Passive losses — Taxpayers who may have qualified for a passive loss deduction may no longer qualify after marriage. Taxpayers can take up to a $25,000 passive loss from rental real estate if they actively participate in the activity. Phaseout starts at $100,000 of adjusted gross income (AGI) and is completely lost at $150,000 for both single and married filers. Married taxpayers filing separately have phaseout thresholds of $50,000 and $75,000 respectively. Also, married couples filing separately may claim $12,500 each if they live apart the entire year. If this condition isn’t met, the deduction is $0.

Back child support payments — If one person owes back child support payments and files a joint tax return with their new spouse, any refunds generated from this joint filing may be used to satisfy this outstanding debt.

Pre-existing debts —If one spouse owes past-due federal tax, state income tax, state unemployment compensation debts, child or spousal support or a past-due non-tax debt, such as a federal student loan, the other spouse’s income could be vulnerable, particularly if the couple resides in a community property state. The other (“injured”) spouse may file Form 8379 with the return to request their portion of the joint refund. Form 8857 should be filed to relieve a spouse of a tax burden if they believe their current or former spouse should be responsible for all or part of the tax. Note: Both spouses’ financial contributions to the household are taken into consideration when the IRS determines available income for payment plan negotiations.

IRS Payment Agreements Guide:

When a taxpayer has an outstanding tax liability, the IRS will delay enforcement action (such as recording a tax lien or levying on or seizing property) until it has given the taxpayer the chance to voluntarily pay the tax or to make arrangements to pay. A taxpayer will usually receive four computerized notices before enforcement action (CP14, CP-501, CP503 and CP504). The notices should be read thoroughly to protect the rights of the taxpayer. Arrangements can be made with the IRS for the taxpayer to come into compliance. These arrangements include: installment agreements (full payment or partial payment) offers in compromises delaying collection until the taxpayer’s financial condition improves (e.g., placing the account in currently not collectible (CNC) status). Special attention should be paid to the collection statute expiration date (CSED) and lien determinations. In general, when a taxpayer is seriously delinquent (i.e., the amount owed exceeds $250,000), the case may be assigned directly to an IRS Revenue Officer as opposed to being handled by the Automated Collection System (ACS) (note that there are other special situations as well). During an installment agreement, penalties and interest continue to accrue. This guide provides high-level guidance regarding the various types of IRS payment agreements.

Installment agreements Under Sec. 6159, the Secretary is authorized to enter into written agreements with any taxpayer under which such taxpayer is allowed to make a payment on any tax in installment payments if the Secretary determines that such agreement will facilitate full or partial collection of such liability. Taxpayers may qualify for a guaranteed, discretionary or partial-payment installment agreement. The discretionary installment agreements are further broken down into streamlined, in-business trust fund express and regular installment agreements Sec. 6331 provides that no levy can be administered while certain installment agreements are pending or in effect. Lien determinations are considered depending on the dollar amount of the liability. A federal tax lien will be filed if an offer in compromise is submitted or the account is placed into uncollectible status. Certain taxpayers who enter into installment agreements on timely filed returns will have the failure-to-pay penalty reduced from a half to a quarter percent per month for any month in which an installment agreement is in effect. If agreements are terminated, penalties increase to one-half percent. Taxpayers must be in tax compliance before the approval of an installment agreement. Compliance with filing and paying estimated taxes and federal tax deposits must be current from the date the installment begins. If it appears that a taxpayer will have a balance due at the end of the current year, the accrued liability may be included in an agreement.

Guaranteed installment agreement Sec. 6159(c) requires the IRS to accept proposals of installment agreements under certain circumstances. Under Sec. 6159(c), the IRS must accept proposals to pay in installments if taxpayers are individuals who:

• Owe income tax only of $10,000 or less (excluding penalties and interest);
• Have not failed to file any income tax returns or to pay any tax shown on such returns during any of the preceding five taxable years;
• Have not entered into an installment agreement during any of the preceding five taxable years; and
• Agree to fully pay the tax liability within three years.

No financial statement is needed. As a matter of policy, the IRS grants guaranteed agreements even if taxpayers can fully pay their accounts. Unlike the criteria for streamlined agreements (below), the dollar limit for guaranteed agreements of $10,000 only applies to tax. There is no lien determination.

Discretionary installment agreement Streamlined installment agreements Streamlined installment agreements are the most common types of agreements and may be approved for taxpayers under the following circumstances:

• The aggregate tax liability, interest and penalties do not exceed $50,000
• The balance can be paid off within 72 months
• The taxpayer has not failed to file any income tax returns The proposed payment is equal to or greater than the “minimum acceptable payment” (the minimum acceptable payment is the greater of $25 or the minimum payment amount reached by dividing the tax liability, interest and penalties by $50). No financial statement is required. There is no lien determination.

In-business trust fund express installment agreement In-business trust fund express installment agreements may be granted if:

• The aggregate assessment of tax liability, interest and penalties is $25,000 or less. It does not include accrued penalty and interest (unassessed).
• Taxes are fully paid in 24 months or before the CSED, whichever is earlier. No financial statement is required. If the amount owed is between $10,000 and $25,000, the taxpayer must enroll in a direct debit installment agreement.

Regular installment agreement Regular installment agreements are used when the taxpayer does not qualify for any of the above. For an individual taxpayer, this typically means the taxpayer owes more than $50,000 and needs longer than 72 months to pay off the liability. The IRS may file a federal tax lien to protect its interest in collecting the debt.

Partial-payment installment agreement If full payment cannot be achieved by the CSED, and a taxpayer has some ability to pay, the taxpayer can apply for a partial-payment installment agreement. A full collection information statement is required, and hence Forms 433-A and/or 433-B must be completed (used to determine the taxpayer’s ability to pay). There is a lien determination. Offer in compromise (OIC) This arrangement allows a taxpayer to settle the debt for less than the amount owed. The IRS grants this relief only if the offer represents the most it can expect to collect from the taxpayer within a reasonable period. Note that OICs do extend statutes of limitations. A federal tax lien will be filed.

Currently not collectible (CNC) status The IRS can place a client’s account in CNC status. Though the IRS will file a tax lien if the client owes more than $10,000, it will cease collection activity. CNC status is temporary, and the IRS will reevaluate (typically annually) whether the taxpayer’s financial situation has changed or systemically reviewed after two years. A federal tax lien will be filed.