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Thus, because these returns were not purpose for smaller firms; by following compliance and may not be able to bill
extended, additional time was required the firm’s normal procedures, there is the clients for the additional expense
for client inquiries and explanations less likelihood of making mistakes or and the additional time in the file.
for returns. Moreover, because not all missing necessary extensions. An extension may lessen the urgency
states pass legislation to conform to the There are potential pitfalls to be felt by taxpayers to compile their finan-
federal tax law by the due date of the wary of when filing extensions. Some cial data; in the event of an increase in
return, retroactive changes at the state elections, such as the mark-to-market taxable income, the delay in organiza-
level also generate notices to adjust the election for traders, must be made by tion of the data creates the possibility
state tax return, again wasting the time the due date of the return without of cash flow difficulties for business
of taxpayers and practitioners. taking into account any extensions. If owners. A taxpayer with a surprise tax
The opportunity for filing a super- extensions are filed without a full review payment due for the prior year may also
seding return is an often-overlooked of the taxpayer’s documents, the need have to make a large fourth-quarter es-
benefit of filing an extension. A super- or benefit of such an election may be timated payment for the current year if
seding return acts as the original filed missed before the due date. the three quarterly estimated payments
return and allows for elections that are An additional area of potential li- for the current year that are due prior
required to be filed with the original ability is in failing to properly advise the to the extended due date of the return
return if they are considered timely filed taxpayers or document having advised were underestimated using old data.
by its extended due date. Even if the them that the extension does not extend The additional penalties and interest
return is filed by the original due date, the time to pay. Taxpayers must still on the underpayment of estimates and
an extension allows for the possibility of provide the necessary data to enable the the late payments of taxes may cause
filing a superseding return and acts as correct tax liability to be calculated and the client to feel the preparer is at fault
a safety net for any missed elections if paid by the original due date. To qualify regardless of when the information is
they are caught before the extended due for an extension, the taxpayer must provided to the preparer.
date. However, superseding returns do properly estimate the tax liability using A final point to consider is that the
not allow a change from married filing the information available, enter the total statute of limitation for errors is three
jointly to married filing separately or tax liability, and file the extension by the years from the date of filing; the clock
changes to other irrevocable elections. return’s due date. A failure to calculate starts on April 15 if the return is filed on
When return due dates are legis- the tax may result in a rejection of the or before that date. A later filed return
latively postponed, such as occurred extension and additional penalties. pushes the time for the IRS to change the
during the filing seasons for tax years Preparers subject to Treasury Circu- return out to three years from the date
2019 and 2020, the period for claiming lar 230, Regulations Governing Practice of filing. However, the taxpayer can file
a refund may be shortened if the return Before the Internal Revenue Service (31 both an extension and a return by the due
is filed after the original due date but C.F.R. Part 10), must follow the due date of the return and retain some of the
before the postponed due date. Under diligence guidelines for preparing and benefits of filing the extension. ■
Secs. 6511(a) and (b)(2) and Regs. Secs. filing extensions found in Sections
301.6511(a)-1(a) and 301.6511(b)-1(b), 10.22, Diligence as to Accuracy, and
a refund claim can be made for three 10.36, Procedures to Ensure Compliance,
years from the date of filing, with the of Circular 230 or face potential penal- Contributors
amount of the claim limited to the ties and liabilities. An example of a
taxes paid or considered paid within a potential area for concern is when a tax- Pamela Slatten, J.D., MBA, is an attorney
lookback period of three years plus any payer has an accepted offer in compro- and senior tax strategist with Marietta
extension period. If no extension was mise or an installment agreement, or is CPAs in Indianapolis. Larry Marietta,
filed, taxes are considered paid on April subject to a pertinent court order; failing CPA, is the owner of Marietta CPAs in
15, even if the return was timely filed on to file or failing to pay the full amount Indianapolis. Stephen P. Valenti, CPA,
May 15. The three-year lookback period of tax due could terminate the existing is professor emeritus of accounting at
stops at the date filed unless a valid ex- agreement or violate the terms of the New York University. Mr. Marietta and
tension was filed to bring it back to the order. It is advisable to document the Mr. Valenti are members of the AICPA Tax
original due date of the return. authorization to file the extension and Practice Responsibilities Committee. For
When due dates are postponed, fil- the calculation of the tax due. Smaller more information on this column, contact
ing extensions as of the original due firms may have a difficult time track- thetaxadviser@aicpa.org.
date of the returns serves a practical ing the information for due diligence

www.thetaxadviser.com February 2022 49