Tax Deadline Extensions Give More Time, But Not Much Else, Advisors Say

Clients who extended the deadline to file a federal tax return to October 15 might feel that they’ve got forever to get their taxes done, but advisors say they should use the time wisely.

They also shouldn't expect to come out ahead by investing their tax returns during the six-month extension period, advisors added.

“Given the current interest rate environment, despite being able to earn healthy risk-free returns on cash balances not given to the IRS, your interest and potential fees paid to the IRS on payment deficits during the extension period are significantly more,” said John Pantekidis, managing partner and general counsel at wealth advisory firm TwinFocus in Boston. “There’s a constant balancing act between modelling actual tax liabilities and how comfortable we are with our models.”

Keeping up with quarterly tax payments is a good use of the extra time. Clients who hold significant private equity can, for instance, try to estimate their income from these funds. “They can keep track of and summarize distributions from funds throughout the year, including a summary of the estimated amount and character of income subject to tax from distribution statements,” said Marci Spivey, a CPA, tax partner and private client services leader at Cherry Bekaert Advisory in Atlanta.

Spivey added that clients with large income swings between years should beware defaulting to “safe” estimates based on 110% of prior-year tax. “[Clients] could end up way overpaid if income is expected to drop significantly,” Spivey said.

Advisors say many clients have no choice but to ask for an extension.

“Most high-net-worth clients file for an extension because they’re waiting for K-1s and other tax documents that they haven’t received yet,” said Beth Sweeney, partner and managing director-wealth manager at Sweeney Wealth Management Group at Steward Partners in Boston. “A lot of companies don’t get these out prior to April 15. Even companies publicly traded and international companies don’t provide their K-1s prior to April 15.”

Clients are a mixed bag when it comes to how they view extensions, advisors say.

“There are clients who just don’t want to extend, even if they don’t have all their required tax documents. Some are so used to extending that they don’t gather the documents timely for CPAs to calculate the extension numbers,” said Akron, Ohio-based Naomi Ganoe, managing director and private client services practice leader for the Northeast Ohio region of CBIZ MHM. “Taxpayers should file when the data becomes available. No need to wait until October.”

Federal filing extensions are typically granted just by requesting one with IRS Form 4868.

“Taxpayers who regularly extend their tax returns ... often want a good estimate of their balance to better plan their cash flow,” added Sarah McGregor, a CPA and tax director at Cherry Bekaert Advisory in Greenville, S.C. “Then it’s a matter of waiting for or finalizing the tax information.”

Taxpayers with complex balance sheets and investment portfolios invested in alternative investments may have no choice but to file extensions because they won’t have all the required tax information by April 15, Pantekidis sid.

At the start of each year, Pantekidis and his firm assesses a client’s projected tax liability for the previous tax year and the client’s safe harbor payments for the new tax year. When a client has experienced a significant one-off realization event, such as the sale of a major asset or the sale of company stock, “we try [to] minimize the current year’s safe harbor payments,” Pantekidis said. “Where one-off events haven’t occurred, we compare actual tax projections with safe harbor payments. If we can’t make reliable projections, we begin paying safe harbor payments and constantly reassess throughout the year.”