Everyone knows that taxes are due on April 15 (unless that deadline is extended by the IRS). What many of us don’t know is that we can put off filing until October – all we have to do is request an extension. It’s simple, but there are some crucial details. Read on to find out how an extension can and cannot benefit you.
Filing Deadlines
Individual and C Corp federal income tax returns are due on April 15 (or the Monday following, if April 15 falls on a weekend). Federal tax returns for partnerships and S Corps are due March 15 (or the Monday following). Certain business and fiduciary returns may have different due dates. If you’re not ready to file by the due date, you may submit an IRS Form 4868 (for individuals) or Form 7004 (for businesses) to request an additional six months to get your return prepared and filed. This form MUST be filed by the original tax deadline in order to qualify for the extension.
Extension Request Forms
They’re both simple forms except for ONE section, which asks you to estimate your current tax liability, enter the total payments you’ve made for the year, and calculate a balance due. In many cases, you’re applying for an extension because you haven’t yet gathered all of your tax information – you don’t know what your current tax liability is! Luckily, you just need an estimate and there are several ways you can come up with one.
· If your income is primarily from an employer (or employers), and you usually get a refund (or owe little) at tax time, you can use the withholding on your W-2(s) as your estimate of both your liability and your payments, resulting in a balance of $0.
· If you owed at tax time last year, and your situation hasn’t changed much, you can use last year’s tax liability as your estimate for this year.
· If you’re self-employed, you may need to use last year’s tax return as a guideline.
· If you’re filing an extension for your pass-through business (S Corp or partnership), and your business doesn’t usually have any taxable income, you can leave those lines blank.
· If you’re filing an extension for your C Corp, use last year’s tax return as a guide.
· If all else fails, make your best guess as to what your liability might be.
Extension Payment
The reason they want your estimate of tax liability is this:
An extension gives you extra time to file your returns, but
it does NOT EXTEND YOUR TIME TO PAY ANY TAX that is due to the IRS.
The IRS has two penalties for lateness: the failure-to-file penalty and the failure-to-pay penalty. Filing an extension saves you from the first (more severe) penalty, but not the second. If you think you’ll owe tax at the time you file an extension, it’s a very good idea to make a payment, even if it’s based on a rough estimate. If you overestimate, you’ll have some of that payment refunded when you file. If you underestimate, you’ll owe penalties and interest on less than you would have if you hadn’t made the payment.
Our Clients
In a normal tax season, we complete about 500 tax returns by the April deadline. We file extensions for the remaining 300-500 in our queue. We routinely file extensions for clients who are new to us as well as current clients whose returns aren’t complete, signed, and ready to file on Tax Day. Some of these are for clients who haven’t brought their documents in, or who brought them in after we had received 500. Some are for clients whose returns require more documentation or information before they can be completed. Still others are for clients whose returns are complete, but they haven’t been signed.
If we have finished your returns or if they’re mostly complete, we can likely give you an idea of whether you need to make a payment by Tax Day and if so, how much. If you’ve provided your tax documents, Carrie can calculate an extension payment for you. If you’re a Level 2 or Level 3 client, the calculation is included in your service package. If you’re a Level 1 client, she can calculate a payment for you, but we’ll add the cost of it to the cost of your tax preparation. If we don’t have your information, or you don’t want to have Carrie calculate a payment for you, we recommend you follow the guidelines above to determine whether and how much you should pay.
If we’re filing an extension for you, and you’ve given us your banking information, we can set up automatic debit of your extension payment.
You must request that before we file your extension.
Otherwise, you can make your extension payment online at https://www.irs.gov/payments or send in a check – we can provide a voucher or vouchers are available online.
Applying Extension Payments
Once you’ve made an extension payment, it must be noted on the tax returns you eventually file. If we didn’t set up your payment, make sure you give us the date and amount, so we can include it on your returns.
Penalties
Note: Under most circumstances, there is not a penalty for failing to file an individual tax return if you don’t owe any tax. Just remember that if the government owes you a refund, you generally only have three years to file your tax returns to claim it!
The federal “failure to file” penalty is 5% of the amount due for each month or part of a month after the deadline. Example: you file on May 26, and you owe $2000. That’s one month and one partial month after the April 15 due date at 5%/month, so your penalty would be $200. If your return is filed more than 60 days after the due date, you’re subject to a minimum penalty of the LESSER of $435 or 100% of the tax owed on your return. If you file an extension on time (whether or not you make a payment), and your return is filed by October 15, you avoid this penalty altogether.
The federal “failure to pay” penalty is smaller: 1/2% of what is owed for each month or partial month. In the example above, you would owe $20 in penalties for failing to pay on time. Obviously, you want to avoid this penalty, too, but it’s not quite as urgent as the other one.
State Extensions
Due dates and penalties vary from state to state, but in Iowa the filing deadline is April 30. Their penalties are more severe than federal. The Iowa penalty for failure to file is 10% of what you owe. The state of Iowa does not have an extension form and does not accept the federal extension form. As long as you pay at least 90% of your Iowa tax, Iowa grants an automatic six-month extension.
If you file your return on time but don’t pay at least 90% of the tax due, the “failure to pay” penalty is 5% of what you owe. Note that you won’t be assessed both penalties – it’s one or the other. But you want to avoid both, so it’s a good idea to make a payment!