Extension stress to be less?
A bi-partisan duo from California and Ohio introduced a bill to Congress last week to help ease the stress of extensions for accountants and taxpayers alike. How, you ask? By making extension payments easier to calculate without the looming burden of unknown penalties.
The SAFE Act of 2023 stands for Simplify Automatic Filing Extensions. The current rules use percentages to determine the amounts that current taxpayers owe with extensions. The safe harbor rules right now require taxpayers to pay either 90% of the current year income tax liability (which is often unknown if they are filing for an extension) or 100% of last year’s liability.
The 100% of last year’s liability is easier to calculate since there are known numbers involved, but if the taxpayer has experienced a significant change in income this can leave them exposed in either direction. Complying with safe harbor rules only saves clients on underpayment penalties and doesn’t eliminate interest if a big bill is still due as a result of an increase in taxable income for the current year.
The stress on tax preparers calculating estimates for clients comes from the unknown. If extension calculations turn out to be inaccurate, clients could owe big money in interest and penalties, with backlash coming at their preparer for not helping them be more informed.
While we cannot do anything about unprepared and last-minute clients who never give us what we need for timely extensions, it really does not reduce the stress of trying to get everything done at deadline time.
The new proposed rule would eliminate penalties for any taxpayer who paid 125% of the prior year tax liability by the time the extension was filed. While this does not eliminate the potential for a big bill or a big refund in cases where clients have had large swings in income, it does help eliminate some stress. Calculations do not need to be as exact to help reduce the likelihood of penalties being applied.
The change would help to make extension calculations almost automatic across the board and hopefully able to be built into tax software. The only cases where it would still be strongly recommended to review calculations would be cases where you know your client has experienced a significant change from the prior year.
Automatic calculations of extensions means that these tasks can be delegated to or outsourced to more administrative staff as well, hopefully reducing significant hours on tax preparers around deadline dates.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and providing strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.