Until now, individual taxpayers who were unable to meet the April 15 tax return filing deadline could file a Form 4868 and receive an automatic four-month filing extension until August 15. And if August 15 didn't provide enough time to get the tax return completed, taxpayers could provide a good reason for the delay on a Form 2688 and request another extension for two months until October 15.Effective for tax returns due after Jan. 1, 2006, the kinder, gentler, more cost-effective Internal Revenue Service has done away with the second extension request and changed the initial automatic extension period from four months to six. Not only will this action remove the need for taxpayers to come up with a reason for requesting the extra two months to file tax returns, it will cut back on lots of paperwork and processing time.
Starting in January, individual taxpayers can file Form 4868 by the due date of their federal income tax return and receive an automatic six-month extension for filing their tax return. No signature is required on the Form 4868. As has always been the case, the Form 4868 does not extend the due date for making tax payments.
Final and temporary regulations have been issued describing the new simplification procedures. Treasury Decision 9929 is available on the IRS Web site at www.irs.gov/regs.
"It's a win-win situation for both taxpayers and the government," said IRS spokesman Eric Smith. "Any time forms are filed with the IRS, there are costs associated with processing those forms." The IRS is estimating that the change in the automatic extension process may save the agency as many as 9 million man-hours and approximately $4.6 million dollars each year.
According to IRS research, switching to a six-month automatic extension and doing away with the second extension request will save taxpayers between $73 million and $94 million each year in professional fees and administrative costs.
"This will definitely save administrative time," said Keith Palmer, director of taxes for Seattle-based CPA firm Moss Adams. "For every client that gets extended to August 15, 20 percent to 30 percent of them get extended to October."
Smith estimated that nationwide, approximately 9 million individual automatic extension forms are filed each April, and about a third of those request the additional two-month extension to October 15.
Even though taxpayers currently have the right to request a second extension to October 15, some practitioners like having the August 15 deadline because it provides an excuse to motivate clients to file their returns in the summer. By changing the deadline to October 15, "We lose that ability to call somebody and say, 'Hey! Your return is due August 15!'" said Richard Frohmader, tax director for Madison, Wis.-based Virchow Krause & Co.
States get into the act
Some states have already announced plans to match the IRS terms for lengthening the automatic extension period. Rhode Island, for example, used to have a two-step extension process like the IRS: first an automatic four-month extension, then the opportunity to request an additional two-months. Michael F. Canole, the chief revenue agent for the Rhode Island Division of Taxation, announced recently that the state is instituting a new one-step six-month automatic extension for tax returns due in 2006.
More states can be expected to follow suit as the 2006 tax filing season approaches.
Not all states have to change their extension instructions in order to keep up with the feds. In Indiana, for example, the extension rules are worded in such a way that they simply follow whatever rules the IRS allows: "You will have thirty (30) days beyond the federal extension period in which to file your Indiana return."
Businesses are affected too
Extension policies are changing for business tax returns as well. The new tax regulations provide an automatic six-month tax return filing extension for non-corporate businesses such as partnerships and trusts.
Starting in January 2006, all businesses will use the new Form 7004 for extensions. Henceforth the Form 7004 will be called, "Application for Automatic Six-Month Extension of Time to File Certain Business Income Tax, Information and Other Returns." No signature is required on the Form 7004.
Tax returns that could previously be extended with Form 2758, "Application for Extension of Time to File Certain Excise, Income, Information and Other Returns," may also use the new Form 7004 and obtain automatic six-month extensions. Gift tax returns can be extended with the new Form 7004 as well.
Coordinating tax returns of pass-through entities with the returns of K-1 recipients could get tricky. By providing an automatic six-month extension to partnerships, circumstances might arise where an individual with a tax return on extension to October 15 doesn't receive a partnership K-1 until the extended individual tax return is due.
Furthermore, corporations that have an extended due date prior to October 15, and that have a partnership whose tax return is on extension, might not receive the necessary K-1 forms until after the corporate extended due date has passed.
In the explanation that accompanies the temporary regulations, the IRS noted its concern that the automatic six- month extension for pass-through entities might cause a burden to taxpayers who are waiting for K-1 forms so they can file their own extended tax returns. Even though this potential problem existed under previous rules, by making the six-month extension period the norm, more entities might opt for the longer extension period. It is possible that a shorter extension period is appropriate for pass-through entities.
"If the K-1s don't get out until October 15, the individual taxpayer is left high and dry, because they don't have a final K-1 by their own deadline," said Moss Adams' Palmer. "Personally, I'd like to see for all business returns a September 15 deadline to ameliorate that problem."
"There certainly is a recognition that even as we try to simplify and streamline the process, which is what we're trying to do here, there are always some implications that may cause you to not want to make that step," said Smith.
However, as Frohmader of Virchow Krause pointed out, companies should realize that their investors are waiting for these forms and try to get the K-1s out in a timely fashion. "That's part of providing good service as an investment company," he said. "You shouldn't be issuing the K-1s in October."
