A recently decided court case, Baccei v. United States, highlights the adverse consequences when an estate fails to follow instructions in obtaining an extension of time to pay.
The decedent died in September, 2005. Her estate consisted mainly of real estate. Her nephew was the executor of her estate and the trustee of her revocable trust.
The executor, through his attorney, retained an accountant to prepare the Federal estate tax return.
In June, 2006, the accountant filed Form 4768, requesting an automatic 6-month extension of time to file the estate tax return.
Form 4768 consists of four parts:
Part I, “Identification,” requests information identifying the estate. The accountant completed Part I.
Part II, “Extension of Time to File Form 706, 706-A, 706-NA, or 706-QDT (Section 6081)” contains boxes to check to show for which return the estate is claiming an extension of time to file. The accountant completed Part II.
Part III is captioned “Extension of Time to Pay (Section 6161),” and requests a written statement explaining why the estate cannot pay the tax in full, and the extension date requested (not more than 12 months). The accountant did not complete Part III.
Part IV, “Payment to Accompany Extension Request,” contains three lines. Line 1 is for the estimated amount of tax due. Line 2 is for the cash shortage (with an instruction to complete Part III.) Line 3 is for the balance due (with an instruction to subtract line 2 from line 1). The accountant completed Part IV.
The accountant filed the extension with a cover letter. The estate timely filed the estate tax return on extension. The return showed estate tax of over one and a half million dollars, which the estate paid with the return. The IRS asserted a sizeable late payment penalty which the estate paid and then sought a refund claiming that it had timely applied for an extension of time to pay the estate tax, and had established reasonable cause.
The court held for the government, saying that the estate did not request an extension of time to pay because Part III was not completed, and that neither the Form 4768 nor the cover letter specified the date to which an extension of time to pay the tax was requested.
The court noted that the statutes and regulations make a clear distinction between extensions of time to file and extensions of time to pay.
A 6-month extension of time to file is automatic – provided the Form 4768 is timely filed.
An extension of time to pay is discretionary, and can be requested for up to 12 months at a time. While the same Form 4768 can be used to request both extensions, they are nevertheless separate extensions.