If your high-net-worth client wants a tax-filing extension (from April to mid-October), don’t assume he or she is just disorganized.
Taxpayers who want up to a six-month extension to file their tax return file IRS Form 4868 have until mid-October to file. In recent filing seasons, some 10 million filers opted annually for the extra time—the IRS does not publish specific numbers. Victims of natural disasters also often receive extensions of filing and payment deadlines, and members of the military serving in combat zones also frequently have extra time to file.
According to 2016 filing figures (the latest complete year of return-processing statics available from the IRS), the agency had processed 134,587,120 by mid-May of that year. By that November, the IRS had processed 150,018,266 returns, or about 11.5% more. That compares with roughly the same percentage of difference in comparable periods of 2015 and is a slight increase over 2014 numbers.
There is no penalty or charge—and, tax specialists claim, no risk of future audit—by asking for an extension. In fact, the IRS doesn’t even ask for a reason, though the extension does not grant more time to for your client to pay any taxes owed.
High-net-worth clients often file extensions—but not by choice. “We have very few clients who request extensions. It’s more likely that they are forced, by virtue of their investments, to file extensions due to unreceived K-1s,” says Aaron Blau, a CPA and enrolled agent in Tempe, Ariz. “In fact, most of our high-income clients are upset when we have to file extensions for them.”
“The absolute major reason [high-net-worth taxpayers] file in October is that they’re invested in partnerships that include hedge funds and private equity,” says John Mezzanotte, managing partner with Marcum LLP in Greenwich, Conn. “Many of these entities don't give them the information they need, the K-1, until mid-September,”
K-1s are used to report a partner’s share of income, deductions, credits and so on. They are an increasingly complex document and their late mailing date in the calendar year is becoming legendary.
“Returns at the trust and partnership level often go on extension and are finished in August, which leads to the beneficiary/partner getting a slew of K-1s that then need to be incorporated into their personal return,” says Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies, Cheshire, Conn.
“These are almost always K-1s from investments in partnerships, limited liability companies or S corporations that have extended the return at the entity level, or 1099 forms that have been corrected and amended,” says Louis Sands, CPA, tax director at the accounting firm Sikich in Naperville, Ill. “Most deduction amounts are currently available well in advance of the filing deadline [so] aren’t typically the reason clients seek extensions.”
Even if taxpayers are able to acquire the information required to file the return, they sometimes still delay delivering the materials to their tax preparers, especially if no additional tax is owed with an extension, he adds.
Reform proposals to date will likely not affect HNW clients’ extensions.
“Increasing the standard deduction may simply make more people qualify for the short form, but unless you know for certain that the total of deductions is less than the standard, you still need to tally the numbers,” Armstrong says. “It may make it easier for some returns if there are fewer categories that can reflect deductions. It all depends on how the code is written and, as of now, there is so much speculation.”
“Larger potential deductions and credits for some taxpayers, the elimination of other deductions, fewer tax brackets, and potentially no alternative minimum tax would all streamline many returns,” Sands says. “These changes may not necessarily, however, lead more taxpayers to file in April.”