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By Michael Gray

Extensions of Time To File

Reader comment

Dear Mr. Gray,

I think you made a number of serious mistakes in [your article about valuation disputes].

First, there is no need to file a return if a taxpayer has Incomplete information. He or she need only get an automatic extension until August 15th (and subsequently until October 15th). There will be less Attention given the valuation issue on an original return than on an amended return.

An amended return invites error by the Service because it flows outside the normal processing channels. Finally, in 18 years of practice in public accounting, I found amended returns to be my number one audit trigger. I always avoid them like the plague.

Nathan Reneau
Seguin, TX

Response

Thanks for your comment, Nathan.

In the "heat of battle" of tax season, I shortcut my observations. Let me elaborate on this issue.

First, remember that in this newsletter, I am often sharing my opinions. Other tax practitioners may not agree with me. That's okay with me.

I agree with Nathan that extensions are useful to get additional time for "fine tuning". We tax return preparers couldn't survive without them.

I also agree that filing an amended return is a "red flag" that increases the chances of being audited. But I have been in public accounting over 26 years, have filed hundreds of amended returns and only had a handful audited.

When I suggest that extensions be avoided, I am intentionally being conservative in trying to help readers avoid unnecessary penalties, particularly for late filing. The late filing penalty is five percent per month to a maximum of 25 percent.

In order to be in the right position to file an extension, you should (1) have a good handle on your numbers (the tax due) and (2) have the cash to pay the tax. When you are going to dispute the value of stock received, you don't have a good handle on the numbers. In addition, many of the people who want to dispute the value of the stock received are also in the position where they don't have the funds to pay their income taxes. Any balance of tax due when the tax return is filed represents an exposure for the late filing penalty.

According to the Treasury regulations for the requirements to file a valid automatic extension request, "an application for extension must show the full amount properly estimated as tax for the taxable year." (Reg. § 1.6081-4(a)(4).) The regulations relating to reasonable cause for failure to file a tax return state that if a taxpayer satisfies the requirement of showing the full amount estimated as tax, the taxpayer has a reasonable cause for failure to file during the extension period provided (1) the excess of the amount of tax shown on the return over the amount of tax paid by the original filing date (including the amount paid with the extension form) is no greater than 10 percent of the amount shown on the return (restated - 90% of the tax is paid by the due date), and (2) any balance due shown on the return is paid with the return. (Reg. § 301.6651-1(c)(3).)

(For California taxpayers, the extension is paperless so the amount of the tax need not be stated. You are still required to pay at least 90% of the tax by the original due date to avoid the late filing penalty.)

A taxpayer can still avoid the late filing penalty by demonstrating a "reasonable cause," but this can be a hassle and the taxpayer is at the mercy of the subjective judgment of a representative of the tax authority.

When there is a dispute about the value of employer stock, there is a good chance of an audit anyway. Unless you already have a good handle on your tax liability or can make an extra large deposit with the extension form, avoid increasing the amount owed by filing your tax returns on time.

Another reporter seeks volunteers

Joanna Glasmer, a reporter for Wired, is seeking volunteers willing to share their painful experiences with stock option disasters for this tax season. If you are willing to share, write to joanna@wired.com.

IRS Circular 230 Disclosure:

As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Consult with a tax advisor

For our readers who aren’t tax advisors, this newsletter is intended to alert you about tax issues that could affect you. It is not a substitute for advice from a professional tax advisor. You will find that getting advice from a qualified advisor is a worthwhile investment. We intend to eventually publish a directory of ESOAA members who are committed to helping clients with employee stock option issues.

Tax advisors should view the newsletter as an alert to become aware of issues relating to employee stock options for further research and study.

(Michael Gray is the co-author of Employee Stock Options – A Strategic Planning Guide for the 21st Century Optionaire. You can order the book at http://www.amazon.com or http://www.barnesandnoble.com/ or buy it at Stacey’s Books.)

P.S.

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