IRS Shortens Filing Extension Deadline for Some Entities

By Alistair M. Nevius, J.D.

At the end of June, the IRS announced that it was changing the extended due date for certain returns from six months to five months (T.D. 9407; REG-115457-08). This was done to solve a problem some individual taxpayers have been having in which they receive timely Schedules K-1 on October 15 (or shortly before), leaving them no time to adequately prepare their personal returns.

The new rules affect entities that file Form 1065, U.S. Return of Partnership Income, Form 1041, U.S. Income Tax Return for Estates and Trusts, or Form 8804, Annual Return for Partnership Withholding Tax (Section 1446). In tax years ending after September 30, 2008, such entities will only be able to extend the due date for such returns by five months. In most cases, this will mean that they must furnish Schedules K-1 to individuals one month before the Form 1040 extended due date of October 15.

Because Form 1120-S, U.S. Income Tax Return for an S Corporation, generally already has an extended due date of September 15, S corporations are not affected by the new rules.

Automatic extensions: The regulations also provide simplified procedures for taxpayers to obtain automatic extensions of time to file certain returns and remove the signature requirement and the requirement for an explanation of the need for the extension.

Individuals will now be granted an automatic six-month extension, as long as they file Form 4868, Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return. Until now, individuals could receive only a four-month automatic extension and then had to apply for a discretionary two-month extension, using Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return. With the increase in the automatic extension to six months, the IRS has eliminated Form 2688.

Temp. Regs. Give Guidance on Return Preparer Information Disclosures

The Service released final and temporary regulations that govern the disclosure of a taxpayer’s Social Security number to overseas return preparers (T.D. 9409; REG-121698–08). Under the temporary regulations, such disclosure will be permitted in limited cases, with the taxpayer’s consent.

Return preparers are generally forbidden to disclose a taxpayer’s Social Security number to any return preparer located outside the United States or to seek a taxpayer’s consent to such a disclosure (Regs. Sec. 301.7216-3(b)(4)). The new regulations provide that a tax return preparer within the United States may (with the taxpayer’s consent) disclose a Social Security number to a tax return preparer located outside the United States when both tax return preparers maintain an ‘‘adequate data protection safeguard’’ and the tax return preparer located within the United States verifies the maintenance of the adequate data protection safeguards in the request for the taxpayer’s consent.

Rev. Proc. 2008-35 describes what “adequate data protection safeguards” are and gives rules for the form and content of a taxpayer’s consent.

The regulations are designed to reduce security risks (from loss of the taxpayer’s Social Security number) while still allowing overseas preparers to have access to the Social Security number in certain circumstances. Scenarios in which an overseas preparer might need access to the taxpayer’s Social Security number include, for example, when the overseas preparer is the signing preparer or needs an unredacted copy of the taxpayer’s return in order to help the taxpayer receive treaty benefits from a foreign country.

The regulations also clarify that the general prohibition regarding disclosure of Social Security numbers applies only to those taxpayers filing a return in the Form 1040 series. The regulations were effective July 2, 2008.

Final Regs. Clarify “Counting Nights” Rule for Dependents

When a child of divorced or separated parents lives with both of them during the year, the right to claim the dependency exemption may be released by the “custodial parent” (Sec. 152(e)). The custodial parent is defined as the parent with whom the child resides for the longest period of time during the year (Sec. 152(c)(4)(B)). Proposed regulations defined “custodial parent” as the parent with whom the child resides for the greater number of nights during the year (REG-149856-03).

Practitioners have asked the Service to clarify the term “night” when determining the child’s residence. For example, is it determined by the child’s location at midnight (or some other time), or by where the child sleeps that night? And in which year is the night that spans December 31 and January 1 counted?

The Service has issued final regulations (T.D. 9408) saying that a child is counted as residing with a parent for a night if the child sleeps at that parent’s residence, regardless of whether the parent is at the residence during that night. If the child does not sleep at the parent’s residence but is with the parent while sleeping (such as when the parent and child go on vacation), then the child resides with the parent for that night.

Nights that extend over two tax years are counted with the tax year in which the night started.

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