What Makes A Tax Extension Valid?

 

You file an extension on April 15th for your personal tax return.

Is the extension valid if you wind up owing money but entered zero (-0-) on line 6?

What if you entered a balance due on line 6 but entered zero (-0-) on line 7?

A couple of things come immediately to mind:

(1)  There are clients – numerous clients – who have no intention of fully paying their taxes by April 15^th. The best the CPA can do is get them to pay something - anything - to take the pressure off the tax due (plus interest and penalties) when they finally file. I have heard the scold many times over the decades: the tax should be fully paid-in by April 15; the extension is for time to file not time to pay; yada yada. This is not a classroom, folks. This is real life, and I cannot control people. I think that I do some good just by nudging clients closer to compliance with the tax law.

(2)  Are you trying to get me sued? What if I (i) enter a number on line 4 but (ii) file the extension with no payment due (line 6)? Will the IRS bounce the extension? This is where procedural consistency is critical. I need high confidence in how the IRS will process this extension.

Let’s look at Karp.

The Karps wanted the IRS to apply a 2016 tax overpayment (of $336,558) to a later tax year.

Problem: The Karps were not diligent about filing tax returns on time. They were counting on that huge overpayment/carryover to keep them out of trouble. While true, there are ways this can blow up.

The IRS told the Karps that the 2016 overpayment could not be applied to 2017 because they filed the 2016 return in April 2021.

COMMENT: That’s how it blows up: you have to get that return in within 3 years (plus the extension, if you obtained one). The 2016 return was due April 15, 2017. Three more years is April 15, 2020. The IRS did not receive the return until April 2021 - a year late.

The Karps responded with proof that the IRS received their 2016 return on October 15, 2020.

COMMENT: Good! That is why practitioners recommend certified mail (which is becoming a dinosaur as we move to electronic filing) with proof of mailing.

FURTHER: We are not told whether the Karps actually waited until the last day for filing or were instead impacted by IRS closures during COVID.

The IRS backed down when presented proof. The IRS refunded $154,720 and credited the remaining 2016 overpayment to 2022.

The IRS then changed its mind.

Huh?

The IRS argued that the 2016 extension was invalid.

Because it was invalid, there was no extension until October 15, 2017.

Which means that the 2016 return filed October 15, 2020 was outside the three-year window (without the extension, that date was now April 15, 2020). The IRS wanted its $154,720 back. Oh, the IRS also reversed the portion of the overpayment that was credited to 2022.

“No soup for you” snarled the IRS.

Let’s catch our breath.

First, what was the IRS’ reasoning to blow up the 2016 extension?

The IRS looked at Form 4868 and saw zero (-0-) on both lines 5 and 6.

Mind you, the Karps had a sizeable overpayment from 2015 to 2016 (in fact, the Karps had reported sizeable overpayments for years). There was enough there to pay a subsequent year’s tax and send the Karps a refund check for 2016.

The IRS was relying on a Tax Court case (Crocker) where the taxpayer did not appear to even try to estimate the tax due on the extension. When finally filed, the return showed significant additional income and tax (because: of course). The Court agreed with the IRS that the extension was void. The return was late. Penalties. Interest. Brussels sprouts and lima beans. It was catastrophic.

Second, how was the IRS to know?

The 2015 return had not been received or processed by the time the 2016 extension arrived. Maybe - if the Karps ever got around to filing a tax return on time - the IRS might have had a clue of knowing what they intended for 2016.

While I disagree, I do have some sympathy for the IRS.

First, the Court noted that the Karps had a track record of (a) huge overpayments that (b) they repetitively applied to the following tax year.

COMMENT: I personally think this was THE factor that saved the Karps here.

The Karps looked at that overpayment and said: we do not owe anything for 2016. They then put zeros all over that Form 4868. Technically, they should have put (1) estimated gross tax on line 4; (2) the overpayment on line 5: and the (resulting) negative amount on line 6. The Karps did not do that, explaining that they mistakenly thought that the tax estimate was the amount they would be required to pay upon filing. The Court considered it a ministerial error, and they had conflated gross tax with net tax.

The Court also pointed out – devastatingly, I think – that the IRS initially accepted the 2016 return, including the extension as filed. That is why the IRS now wanted the refund check back.

Second, the Court noted that the IRS was put in a tough spot, as it did not have a 2015 return when processing the 2016 extension.

While it was easy for the Court to point out that the Karps had applied their prior overpayments, the IRS could not automatically predict that they would do so again. This dance was getting close to: heads you win, tails I lose for the IRS.

The Court pointed out that the Karps were still within procedural guardrails. They pushed it, but they got it done within three years.

Technically correct, but not an optimal real-world approach to tax filing.

The Court ordered summary judgement for the Karps and instructed both sides to sort the dollars involved and report the results back to for judgement.

I point out that this was not a Tax Court case. It was heard in the Court of Federal Claims, which hears civil claims against the federal government. While specialized (cases against the U.S. government), it is not the same specialization as the Tax Court (which hears only tax cases).

The cynical part of me wonders if the verdict would have been the same had the case gone to Tax Court. The Karps had an advantage: many cases go to Tax Court because one does not need to pay the tax before bring suit in Tax Court. Here, the Karps had already paid the tax (hence the huge overpayment), so filing outside the Tax Court was an option.

Our case this time was Karp v United States, U.S. Court of Federal Claims, No. 23-926, filed May 21, 2026.

A CPA Takes Tax Advice

 

The facts are not difficult. In fact, they are rather straightforward.

What puzzles me is the player:

Mr. Igboke has been a certified public accountant for more than 30 years and regularly prepares tax returns for his clients. He knows how the federal income tax rules work ….”

I get it: not all CPAs do taxes. Some do taxes, but so few and infrequent as to not count. I used to work with a CPA - since retired - who was a career auditor. He could run circles around me when it came to reports and disclosures and such. He however prepared two returns a year, and his personal return was one of them. He had me review the other.

Mr. Igboke prepared taxes, we are told.

Let’s go through it.

Mr. and Mrs. Igboke (Igboke) lived in Long Beach, California. In 2003 they borrowed from Bank of America. They ran into financial issues not long after, and in 2006 their loan somehow wound up with Select Portfolio Servicing (SPS).

In 2020 Igboke refinanced with a credit union; the mortgage servicing was done by Cenlar.

Let’s go forward one year.

Igboke claimed a mortgage interest deduction of $47,119 on his joint 2021 individual tax return.

Problem: Cenlar issued a Form 1098 for $18,411.

Not the hardest thing for IRS computers to match.

The IRS sent notices. Back and forth they went, to no avail. In 2024 the IRS issued a Notice of Deficiency (called a NOD or sometimes SNOD).

Igboke filed with the Tax Court.

A 30-year CPA with some tax experience. I have no idea if this was his first time in Tax Court, but I am nonetheless expecting a ball with some movement over the plate.

Igboke provided the Court with:

(1)  A “substitute” 2021 Form 1098 from SPS

(2)  An explanatory letter from SPS

Wait, I thought SPS was paid-off in 2020?

Here is the Court on the 1098:

It states in box 1 that Mr. and Mrs. Igboke paid $71,618 of mortgage interest in 2021 …”

Here is the Court on the letter:

Dear Henry Igboke: SPS is in receipt of your recent request for information about the account. Our records show that for calendar year 2021, you paid a total mortgage interest of $31,635.”

I admit: I am not following the numbers:

(1)  The unexplained mortgage interest on the 2021 return was $28,708 ($47,119 – 18,411).

(2)  Then we have a $71,618.

(3)  And next we have a $31,635.

These numbers are parachuting from the sky.

The Court looked closely at the 2021 Form 1098.

All the numbers on the purported 2021 form are identical to those from 2020, including the interest paid and loan balance. But, on the purported 2021 form, the year 2020 has been replaced with 2021, and there appear to be irregular photocopier markings around the year.”

Oh oh.

The Court looked at the SPS letter:

… SPS’s recordkeeper could not find copies of either document in SPS’s records.”

As Ricky would say: someone has some explainin’ to do.

Igboke admitted he had no outstanding loan with SPS and paid no interest in 2021.

Nahhhh, really?

Igboke asserted that SPS sent the Form 1099 because they were unable to deduct the full $71,618 of interest paid in 2020.

QUESTION: How would SPS know this?

SPS told him that he could carry over some portion of that undeducted interest from 2020 to 2021.

COMMENT: And who does he get his medical advice from: Tik Tok?    

Folks, the rules for deducting interest expense can get complicated.

It helps to categorize the interest: investment interest is deducted this way; mortgage interest that way, and vehicle loan interest yet another way. It gives some order to the rules.

Some interest can carry over from year to year. Most interest cannot. You know which interest cannot?

Mortgage interest cannot.

It has been that way since before I heard of accounting.

Here is the 2013 Smoker tax case:

It is well settled that a cash basis taxpayer … is allowed a deduction for interest paid during the year in cash or its equivalent.”

In other words: show me the money.

Back to the Court:

We do not credit Mr. Igboke’s explanation.”

… the discrepancies noted above strongly suggest that these documents are not authentic and were created for the purposes of supporting the Igboke’s claimed deduction.”

This could have gone much worse.

I would have expected heightened penalties for a 30-year CPA.

Maybe a visit from the IRS Office of Professional Responsibility.

Or contact from the California State Board of Responsibility.

Worst case: all of the above.

Igboke lost the deduction, of course, but he may have been lucky to even survive this.

Our case this time was Igboke v Commissioner, T.C. Docket 12275-24, dtd 6.3.26.

If Only

 

It isn’t much. The Tax Court decision itself is scarcely 4 pages long.

Still, it made me laugh.

It also made me think that - if he could pull it off - this might have been best tax planning idea I ever came across.

His name is Kelby Daniel Reyes Barrios (Barrios). He lives in California and he appears to be a gig worker.

He filed a 2022 tax return showing $8,964 of total income.

The IRS was chasing him for $3,842 of additional tax on unreported income of $15,206.

COMMENT: I still don’t see how that is enough money to live on, not to mention … California.

Barrios filed a timely petition with the Tax Court.

Then he disappeared.

The IRS motioned for summary judgement. The Court, to its credit, provided Barrios a final opportunity to respond.

He ghosted.

The only thing the Court had to review in his favor was his declaration on the Court filing:

On his petition he asserted that he did not report the income because the tax ‘forms were mailed to a [previous] address’ and he received them only after filing his return.”

We have probably all heard a version of this logic: no form, no tax.

The IRS held for the IRS, of course. The tax Code asserts that all income is reportable, whether it draws a 1099 or not (granted, the “not” is an increasingly endangered species).

Still, think about it: one could beat the tax man by getting a return in before 1099s are distributed.

If only.

Our case this time was Kelby Daniel Reyes Barrios, T.C. Memo 2026-32.