Why “Extension” is not a Four-Letter Word for Tax Season

Up until January, I worked in public accounting and remember all too well the feeling when the calendar flipped to March; it seemed like all I was hearing from my individual clients was that they still had not received their 1099s from their brokerage accounts. It seems every year the compression of when these 1099s are received and the deadline to file gets closer and closer. Not to mention the frustration of getting those amended 1099s right after the client’s tax return has been assembled. Talk about adding fuel to the fire!

There are strategies and processes you can implement to encourage your clients to bring in all of their tax return data (with the exception of the late 1099s) so that you will have everything ready to go and can quickly finish the return once the 1099 arrives. However, despite these well intended strategies, the reality is that it feels nearly impossible to move all the returns that have complicated, late arriving 1099s through the entire process before April 18^th (or April 19^th in the case of residents of Maine or Massachusetts).

As you are try to manage the workflow in your office, it is a good time to give your clients an education about the extension process, and why it might be the best choice for some of these clients.

Proactively address concerns and questions

If I file an extension, will it increase my audit risk? Does an extension increase my tax return fee? When will I receive my return if I file an extension? Why do I have make a payment if I am filing an extension?

I’m sure you have heard these questions as well as others related to the extension process. To help practitioners, as part of the Tax Practitioner’s Toolkit the AICPA developed a tool for members to help communicate the answers to these questions. FAQs from the Tax Practitioner’s Toolkit (My CPA says “Extend” – What Does That Mean to Me?) will save you valuable time with those clients who need encouragement and maybe a little handholding if this is the first time you have brought up the topic of extending their tax return.

Draft talking points for clients about the benefits of filing an extension

Clients do not want to hear the primary reason for filing an extension is that it will help your firm smooth out the workload. So, use the “WIFM” principle (What’s in it for me?) to help them see it really is in their best interest to file an extension.

Their return will be reviewed and completed when everyone has had a little time to rest and recharge their batteries. We are all humans and understand that when we are tired, we make mistakes. So, fresh eyes on a tax return might catch something that would otherwise be missed, or even better, might see a different way of structuring a transaction that would be better for the client.

If the client is not expected to receive a refund, and will continue to be paying estimated tax payments, filing an extension will not affect the client’s cash flow situation.

If all the information has been received, make the promise (and stick to it), that the return will be completed prior to the June 15^th estimated tax due date. That way, the client still has an expectation about when to expect the tax return and they will be able to make their quarterly estimated payments with good information about the previous year’s results.

Develop a letter or memo that prompts clients about what you need from them in order to file an extension

Creating templates is another way to automate processes and help you be more efficient in this busy time. The AICPA’s Tax Section has created a sample letter that may help you gather necessary information from clients without having to make phone calls to procrastinators–we all know a few of those!

Design a workflow process for filing extensions

Determine the procedures and communicate them to your staff and your clients so that the process will move along as efficiently as possible. Try to think of every scenario and what makes the most sense for your client base. For example, how will you handle extensions with payments due? How will you indicate in your due date monitoring system that the tax return has been extended?

Develop a plan for work needed on extended tax returns

So, you have convinced your client to file an extension. Now, what? You must develop a process for determining if a payment will be due with the return, since the client will not be happy paying late payment fees just because you did not have time to properly estimate their tax due.

Remember to incorporate 1^st quarter estimated payments

At my previous firm, we would often include a safe harbor amount for first quarter with the extension payment (with rounding done based on client sensitivity). That way, your client has a little cushion if an estimate turns out to be incorrect. If that’s the case, you can always catch up the quarterly payments with the June 15^th payment.

Right after filing season is a great time to compile a list of what went right and what went not so right in your practice, including extension workflow. Be strategic in thinking about how you could better communicate with clients before, during and after filing season. This might save you time and energy when

In the meantime, I wish you a successful completion to Tax Season 2016!

April Walker, CPA, Lead Technical Manager – Taxation, American Institute of CPAs.

Tax extensions courtesy of Shutterstock.

Why “Extension” is not a Four-Letter Word for Tax Season

Related Stories