The changes in due dates creates potential professional liability exposure for CPA firms. How? Clients may fail to timely remit information to the CPA firm to permit the CPA to prepare returns, resulting in an unnecessarily compressed timeline for preparation of the tax return and an increased potential for an error or omission.
On March 17, 2021, the IRS announced that the due date for individual federal income tax returns would be automatically extended one month, until May 17, 2021.
The changes in due dates create potential professional liability exposure for CPA firms. How? Clients may fail to timely remit information to the CPA firm to permit the CPA to prepare returns, resulting in an unnecessarily compressed timeline for preparation of the tax return and an increased potential for an error or omission.
Unlike 2020, only individual income tax returns have been extended until May 17, 2021. In addition, the IRS did not extend the deadline for first quarter 2021 estimated federal tax payments which remain payable on April 15, 2021. Clients may assume that the aforementioned extension applies to all filings and not permit sufficient time for the CPA to prepare their first quarter estimate. If not paid timely or calculated properly, the client may assert that the CPA should pay any related interest and penalties. In addition, if clients are required to sell assets at a loss in order to make the estimated payment, they may later assert that the CPA is responsible for the losses due to unclear instructions.
What about the states?
Although some states have announced an extension of their filing deadline, not all states, municipalities or other taxing jurisdictions have done so. The potential for numerous shifting deadlines increases the likelihood that a return or an extension may not be filed on time. If so, a client may assert a claim to recover penalties and interest.
Special considerations for Louisiana, Oklahoma and Texas taxpayers
Victims of the winter storms in Louisiana, Oklahoma and Texas have been given until June 15, 2021 to file federal individual and business tax returns and make payments originally due during this period. This includes individual and business returns customarily due April 15, as well as various 2020 business returns due March 15. This also means that affected taxpayers will have until June 15, 2021 to make 2020 IRA contributions. See the guidance referenced below for other federal tax filings.
Affected taxpayers in a federally-declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return in either the year of the disaster or the prior year. Clients may be unaware of this opportunity or the CPA may miscalculate this complex deduction. Nevertheless, a claim may be asserted against the CPA for additional costs incurred by the client in either scenario.
Finally, each state has provided complex and nuanced guidance regarding its treatment of affected taxpayers which is referenced below. As such, following the relevant state guidance is imperative. Special care should be taken with Oklahoma taxpayers, in particular, as the guidance appears to indicate that the Oklahoma Tax Commission is not authorized to extend the due date of tax returns but does permit the Commission to waive penalties.
A docket system, perhaps now more than ever, may be your best tool to help monitor deadlines to ensure they are not missed. Be sure to update it for filing and payment date relief that has already been granted, and continue to do so as additional changes are announced. Review critical components of a docket system as discussed in "Professional Liability Spotlight: Docket or Lose It: Avoiding the Risk of Missed Deadlines," JofA, Dec. 2018.
Ensure clients understand that federal first quarter estimated tax payments remain due April 15, 2021. Timely communication on this matter is critical to allow clients time to determine the source of their tax payments.
As always, contemporaneous documentation of client communications is important and helps to mitigate the risk of forgotten, misunderstood or misinterpreted discussions down the road.
The AICPA is advocating for extending the federal due date further to June 15, 2021 and for additional returns to be automatically extended. In addition, states continue to update their guidance. As such, it is important to monitor these developments. The Resources section below includes links to relevant AICPA analysis of this guidance.
Louisiana, Oklahoma, and Texas Guidance
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