H.R. 3566, the Simplify Automatic Filing Extensions (SAFE) Act
Quick Read: Bipartisan legislation would make it easier and faster for individuals to calculate their tax liability when filing for an extension. Under a House bill, individual taxpayers who file an extension and pay at least 125% of their prior year tax liability would avoid penalties. This proposal should reduce the cost and time associated with filing tax extensions, which could result in improved taxpayer compliance.
Issue: Many people erroneously believe that filing an extension with the Internal Revenue Service (IRS) allows them six additional months to pay any taxes owed. However, tax professionals know that getting an extension only gives you extra time to file – not extra time to pay. While the Internal Revenue Code provides for an extension so long as you file the appropriate form by the original due date, taxpayers are required to show the full amount of “properly estimated” tax liability for the current year on the extension. If the estimated tax liability for the current year is inaccurate, there is a risk that the IRS could invalidate the extension and apply penalties. As a result, tax professionals and individual taxpayers filing for extensions by April 15 often perform time-consuming calculations of tax owed in the current tax year, even though they may not yet have complete information. This means putting hours of work into this initial estimation during the tax “busy season” and then a second calculation, preparation, and review process later when the final tax return is ultimately filed.
Bill Summary: H.R. 3566 is designed to simplify the work surrounding federal tax extension filings. Instead of relying on the current rule of calculating a percentage of the current year tax liability, taxpayers would be able to calculate and rely on a safe harbor of 125% of the prior year tax (“125% safe harbor”) to be paid in by the original due date to avoid penalties.
Example: John is self-employed and runs his own plumbing service. He receives his income at uneven times throughout the year. John’s 2022 tax liability (including income tax and self-employment tax) was $20,000. During the 4th quarter of 2023, John’s business enjoyed a big uptick and brought in a lot more revenue than expected. Unfortunately for John, his income from the plumbing business is unknown at April 15. To help manage this problem, John can make sure his 2023 estimated tax payments and federal income tax withholding total at least 125% of his 2022 tax liability ($20,000 × 1.25 = $25,000). If John does this, and files an extension, the extension would be valid and he would not incur the Failure to File penalty, and the Failure to Pay penalty so long as he files his Form 1040 on or before the extension deadline (October 15, 2024).
John ultimately files his 2023 tax return on October 1, 2024 and determines that his 2023 tax liability is $30,000. He already paid in $25,000. John then owes the additional $5,000, plus interest (running from April 15). But he does not owe any penalties.
AICPA Staff Contact
Lauren Pfingstag, Director, Congressional & Political Affairs, Lauren.Pfingstag@aicpa-cima.com