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WHY THIS SECOND EXTENSION BUSINESS, ANYWAY?

August 15, 2003

August 15 is the deadline for extended 1040s. That is, unless you file another extension. While the second extension is not automatic, denials are rare. As a practical matter, second extensions are an exercise in busy work. Other than keeping tax practitioners busy in August, what's the point?

The Treasury Inspector General for Tax Administration (TIGTA) is wondering the same thing. The TIGTA has just issued a report saying the current extension regime not only wastes taxpayer and practitioner time, but it also encourages late payment of taxes.

EXTENDERS AS PROBLEM CHILDREN

The report says problem taxpayers are greatly overrepresented among those of us who extend our returns:

The IRS granted extensions of time to file tax returns to approximately 6.9 million individual taxpayers in CY 1999. Many of these taxpayers subsequently presented the IRS with significant filing and payment compliance problems:

· Approximately 1.3 million taxpayers filed their tax returns after the extension periods had expired.

· An additional 935,000 taxpayers had not filed their tax returns by September 20, 2001 (29 months after the regular April 15, 1999, due date).

· Approximately 2.1 million taxpayers with extensions had failed to pay all of their taxes by the regular April 15 due date.

· Over 700,000 taxpayers with extensions had balance due accounts after filing their returns.

Only 52 percent of the taxpayers with extensions had both paid all of their taxes by April 15 and filed their tax returns by their extended due dates. In contrast, 99 percent of the taxpayers not obtaining extensions had either paid all of their taxes by April 15 or filed their returns by April 15 to report their underpayments.

TOO EASY AND TOO COMPLICATED?

The report says that the extension rules make it too easy to delay paying taxes. If an extension is properly filed, the penaltly for paying less than 90% of your tax due is 1/2% per month. By contrast, the penalty is 10 times larger - 5% per month - if no extension is filed. The report says many taxpayers file the extension just to hang onto the money longer. This gives the taxpayers time to get into financial trouble, making it less likely that the balance due will ever be paid.

While the report says it is too easy to put off paying taxes, the extension procedures themselves are too complicated. They require taxpayers to make a "reasonable estimate" of their tax when they extend, but they provide little guidance as to what a "reasonable estimate" means. The extension requires forms that are not included in the standard package provided to taxpayers. If additional time is needed, the taxpayer has to obtain and file yet another form.

OUTLINE FOR A SIMPLER EXTENSION REGIME

The report outlines steps for a simpler extension regime:

- Replace the "reasonable estimate" requirement with a safe-harbor that avoids penalties when either 90% of current year tax or 100% of prior tax is paid by April 15.

- Provide for a single 6-month extension, replacing the automatic 4-month and optional 2-month extension.

The report also suggests eliminating the need to file an extension form if the safe-harbor payments have been made. This would make the federal rules similar to the current Iowa rules.

GOOD IDEAS, AS FAR AS THEY GO.

These recommendations are sensible. They could be even better if they would also provide that all return-date sensitive deadlines, other than payment dates, be automatically extended by the six-month extension period. This would cover deadlines for SEP and Keogh plan payments; it would also cover automatic accounting method changes and similar items.

WHAT'S NOT TO LIKE?

Practitioners now use the August deadline as a club to get the attention of extended taxpayers who would prefer to not think about their taxes over the summer. These taxpayers might not start to even think about their taxes until, say, October 14, without the August deadline. The problem? That's when some of us do our own returns!

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