With Unclear Tax Impacts, Tax Filing Extensions Multiply

Accountants report a boom in federal tax filing extensions for their business and property-owning clients, largely due to unclarity in new tax legislation.

Accountants say they nudged most of their clients this year toward extensions.  The new tax legislation, the largest reform in decades, leaves many accountants scratching their heads.

There has not been a major tax act since 1986 “said Sheri Fiske Schultz, managing partner of Fiske & Co. “That’s why this is so huge. Our whole tax system has been overhauled.”

Professionals need special guidance for clients whose filings include ownership of a business property or pass through entities the experts say “These business owners may have sophisticated holdings” said Meredith Tucker, CPA Principal at Kaufman Rosin. “Even if they are just a doctor or attorney they might own real estate or just have structured things in a tax effective way that give rise to some complexity.”

Ms. Tucker says plenty of time passed between when Congress passed the tax changes and when the Internal Revenue Service provided guidance on how the laws would be applied.  The IRS did not approve of some regulations until December, leaving less than a month to digest the changes and start filing taxes.

Accountants remember facing challenges at the start of tax filing season. For one of the software use to prepare returns and tax calculations for some clients across several states needed an update. You had a situation where the software was running to keep up and practitioners themselves were implementing these laws for the first time. It requires a large degree of collaboration even within the firm, because it was one thing if laws existed for quite some time and you can look at precedents, but when the law is new,  it requires an enhanced degree of collaboration.” said Mr. Tucker.

Carl Gradinsky, principal in the Tax and accounting department at MVAF, says the government shut down from late December through late January is also partly to blame for the increase in extensions. But confusion surrounding new legislations is the main reason for delayed filings.

“Some of the delays were waiting on some more items from the IRS and some of these rulings,” he said. “The government shutdown may have delayed somethings, but more for the new tax act and just making sure that we have all the guidance we need to make proper decisions.”

Extensions may save clients more money in the long run, Ms. Tucker said “You don’t want to make short sighted decisions to save a dollar today that may cost you ten dollars down the road.”

Accountants say their clients in the business,  entrepreneurial,  and property-owning sphear paid an individual tax in April to not have a late payment penalties. They are submitting paperwork by September,  for those who pass-through entities and in October for those with individual tax returns.

“For a lot of clients,  we said,  “You are preparing a projection for the tax that is going to be owed but what we will do is wait until the dust settles, take a step back and look at these new regulations. Let’s wait until some of these corrections have been made, because we know there were in some cases errors in how the law was passed, and will file”, said Ms. Tucker.

Firms are not working on extensions for all of their clients,  such as those who are we need a W-2 for wages they received.

Ms. Schultz said “The client who is just a W-2 can file the return on time.  There is no reason to delay that tax return.”

Firms are looking closely at the IRS for guidance on how to complete certain forms. Ms.  Schultz said’  “We are still receiving guidance. We are still waiting for more. It has helped us to clarify some of the issues that we were concerned with. One of the major issues is computing the qualified business deduction is and who qualifies for that.”

Accountants agree that the next tax filing season will require fewer extensions, but the number will probably remain higher than several years ago.

“I would guess their work would be less delay and extension going out but more than it’s been in the past just because the complexities with some of the new rules, Mr. Gadinsky said.

And Ms. Tucker says, politics may also play a role in the level of extensions filed next year. There are provisions that sunset after a number of years. It seems to me that in addition to that we are dealing with a nation that has some political instability and I wonder, based on how the next election goes, ‘could this legislation be changed?”

The following tax season filing flow and number of extensions is open to several possibilities. Ms.  Tucker said,  “If certainly there is another major overhaul, like we saw in this recent tax reform, I think you might see the same thing happen again.  In the absence of another overhaul,  my expectation is that things will settle down after this year.”