Your clients may feel like October 15 is still far away, but you know better. Completing a return that is on extension takes time, and you’re getting worried because you don’t have all the information you need. Calls and emails to the clients aren’t producing results. 

You may feel like you’ve seen this movie before, and perhaps it’s time to write a new script. Here are a few actions you can take to address the issue.

1. Issue an alert

Ideally, you sent clients an engagement letter at the beginning of the year that spelled out deadlines and responsibilities of both parties, as well as the consequences if the client does not produce information required to complete a timely return. These letters are important, as they protect the practitioner and make the client aware of the consequences of procrastinating. If your engagement letter didn’t include a deadline, set this now and notify your client by certified mail. 

2. Warn them that those penalties (and related interest) will hurt

People typically hate paying fines or penalties, so this option should be effective for some — if not most — clients. Of course, if you have military clients serving in a combat zone, they have more time to file and pay any taxes due, generally 180 days after they leave the zone.  

• Failure to File: The failure to file penalty can cost your client a lot of money. The penalty is 5 percent of the tax owed for each month, or part of a month, that the return is late up to 25 percent. If the return is over 60 days late, your client will face an additional penalty: the lesser of $210 or 100 percent of the tax owed.

• Failure to Pay: The IRS charges one-half of 1 percent for each month, or part of a month, up to 25 percent of the amount of unpaid tax. In the worst-case scenario, the penalty increases to 1 percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property.

• Interest: If your client doesn’t file or pay on time, they’ll also owe interest. What turns into an unpleasant surprise in future years is a reduction of any refund if they are unable to pay off their debts, which is often due to mounting interest.

Also, if your client receives the advanced premium tax credit for health coverage, hopefully they already filed, because filing late puts them at risk of losing eligibility for future advanced payments.

3. Remind them taxes can be paid in installments

A few clients may be putting off getting you information because they know or suspect they will owe more than what they paid in April. Remind them that the IRS typically allows taxpayers to set up installment agreements. Make sure the clients know that:

• the IRS imposes setup fees for long-term payment plans
• using automatic debits makes a big dent in the setup fee ($31 versus $149)
• interest and penalties will continue to accrue until the balance is paid in full

 

4.Caution them about potential credit implications

While tax liens are no longer a factor in a person’s credit score, the reality is that only consumers with the lowest scores will see much of a benefit, according to a Consumer Protection Bureau study. Regardless of your client’s score, that lien is still a public record, subject to being discovered during a loan or other credit application process. 

Your client could take a hit to their credit if they use a credit card or loan to pay their taxes. If your client’s debt load increases too much in proportion to their income, their score will fall. Similarly, any late payment on that loan will drag down the score. While this issue does not directly connect to late filing or payments, the earlier you can finish the return, the earlier they can plan for the payment and perhaps avoid using a credit card for the whole amount.      

5.  Move on. “It’s not you. It’s the stress”

If a client persists in pushing too close to deadlines year after year, consider whether it’s worth keeping them. Is the revenue and relationship worth the disruption to your office? In some cases, it might be, particularly if the client brings in referrals.

If, however, you are leaning toward firing them, don’t feel guilty. You have important obligations, like minimizing stress to the extent possible to yourself, your staff, and your loved ones. If you decide to let a client go, alert them now so they have time to find someone else. The AICPA’s sample client termination letter is a good place to start for notifications.

Bonus: It might not be your client’s fault.

Sometimes, a client will miss the extension deadline for reasons outside of their control. For instance, if the problem is a late K-1, there’s little that can be done.

Keep in mind, some of your clients may be affected by recent natural disasters, such as Hurricane Florence that just hit the Southeast. These clients, particularly those in the most highly impacted areas, may struggle to get everything in. The IRS extended deadlines and is providing tax relief to those affected by the storm. You can find more information on who qualifies and the new deadlines here. The AICPA has additional information on assisting clients affected by natural disaster on the Casualty Loss and Disaster Relief page.

As a CPA, you have high standards and would rather not do something if it can’t be done well. Accept what you can’t control some procrastinators can be cured, others can’t. Take the steps you can to alleviate the issue now and in the future. If it looks like a client will need to go on extension next year, offer them these FAQs from the AICPA’s Tax Practitioner’s Marketing Toolkit to start the education process early.    

Allison Carter, Communications Manager — Tax, Association of International Certified Professional Accountants    

     

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