Many taxpayers and tax professionals say they are still rushing as the Monday, October 17 deadline for those six-month extensions draws near. The IRS backlog, late forms, fluctuating due dates, Covid-related tax law changes, and taxpayer burnout are just a few of the other reasons, according to tax preparers.
“Everybody is still behind,” said Darren Neuschwander, an accountant and chairman of the American Institute of CPAs’ individual and self-employed tax committee. “I know the IRS is encouraging us to file the returns, but we don’t have the information to complete them.”
Tax experts think that comparable penalty reduction is unlikely for the approximately 12% of taxpayers who must request an extension for the 2021 tax year by next month, despite the IRS recently waiving late filing penalties for returns for the 2019 and 2020 tax years in a rare move.
“Oct. 17 is a real deadline,” says Stuart Rohatiner, a certified public accountant in Miami.
Tax day is traditionally observed on April 15. Individual federal income tax returns for the prior calendar year are due in mid-April, along with any payment due.
Because they were accustomed to having more time to file and pay over the previous two tax seasons, some taxpayers weren’t prepared last April. The IRS delayed the regular April 15 tax filing deadline twice, first to July 15 in 2020 and again to Monday, May 17. This year’s tax day fell on Monday, April 18 for the majority of filers, yet the IRS didn’t budge.
In order to receive an automatic six-month filing extension, taxpayers have to submit a Form 4868 extension request by April 18. Because October 15 falls on a Saturday this year, the deadline for extensions is October 17.
Notably, the extension is only for filing; it is not for paying any back taxes. You had to try your hardest to pay in 100% of what you owe by April 18 otherwise the IRS is likely to impose penalties that, with some exceptions, can amount to up to 25% of the total unpaid taxes.
“The tax laws are changing so much, I tell most of my clients, ‘I’m putting you on extension,’” said John Schultz, a CPA and chairman of the CalCPA’s state taxation committee. That way he can sort out the impact of those changes for his clients.
For a flooring contractor who worked through the epidemic and need more time to complete the computations in order to claim the Covid-related Employee Retention Tax Credit for his company, Mr. Schultz has recently filed 2021 business and individual income tax returns on extension. (The credit, in essence, compensates business owners for decreased gross receipts during the epidemic while they kept hiring employees.) Since the business income is recorded as pass-through income on his person return and is taxed at individual income-tax rates, the return for that S-Corp business had to be completed first.
According to Mr. Schultz, the $30,000 credit had a significant impact on his bottom line.
According to Mr. Rohatiner, taxpayers with partnership income, such as the majority of real estate investors, are also having to wait longer for Schedule K-1s, the forms that show partnership earnings, as well as new K-2s and K-3s for reporting international investments. There is only one month to complete these taxes for people since tax preparers and investment firms must send these papers by September 15th.
Another factor influencing this year’s filings is the IRS backlog of 8.2 million unprocessed individual returns, which includes returns from tax year 2021 and earlier. According to Mr. Neuschwander, he has a number of clients whose 2020 tax returns haven’t yet been finalized. He has been hesitant to file the 2021 tax returns since those returns revealed loss carry-overs or overpayments since the IRS system might reveal a discrepancy. “It’s a Catch-22,” he said.
In some cases, taxpayers are simply choosing to go on extension annually because they are unable to get organized on time. Susie DiMaggio, an enrolled agent who prepares taxes in Ventura, Calif., puts a Hollywood props specialist on extension every year. “You know me, ‘I don’t know who I worked for,’” she said he tells her.
Every summer she pulls his IRS transcript that shows more than a dozen W-2 and 1099-NEC compensation forms and uses those to complete his return. “He owes every year, and he owes a penalty. That’s how he rolls,” she said, noting that the penalties were just under $300 last year.
Here are some guidelines to keep in mind if you are filing on an extension this year.
For taxpayers with K-1s. If you’re waiting for a Schedule K-1, get it to your tax pro as soon as you receive it. “Everything backs up,” Ms. DiMaggio said.
E-file, if possible. Filing electronically and choosing direct d
eposit can help taxpayers get a refund faster, the IRS says.
Pay up. For those who owe taxes and haven’t paid in yet, the sooner you pay, the less you will owe in penalties and interest. For the third quarter of 2022, the interest rate on underpayments is 5%. It jumps to 6% on Oct. 1.
Double check Covid-related payments. Before filing, double check 2021 s
timulus payment and advanced child-tax-credit amounts. Mistakes related to those Covid breaks have caused delays in tax-return processing and refunds, the IRS says.
What if you miss the Oct. 17 deadline? There is no extension beyond Oct. 17. But if the IRS owes taxpayers a refund, it won’t charge penalties for filing late.