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WHAT DOES EXTENDING MEAN TO
YOU? Essential
information you need to know. |
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WHAT DOES EXTENDING MEAN TO YOU? By Tiffany J. Morisue,
CPA, Introduction As the tax filing deadline
is quickly approaching, many procrastinators and those who legitimately are
just not ready to file their returns become stressed out and frantic, trying
to meet what may virtually be an impossible deadline. Many would rather rush to get their returns
prepared than file an extension.
Common concerns include, but are not limited to, being flagged as a
late filer, being assessed penalties, or being more likely to be
audited. If you are one of these
individuals, I hope that I can put your mind at ease and inform you of what
it really means to extend your tax return and the benefits of doing so. A few notes before getting
started: ·
This article
is written assuming a tax year that is the same as the calendar year, which
is the case for most individual taxpayers. ·
If a tax
deadline noted falls on a holiday or weekend, the deadline is actually the
next business day. ·
The focus of
this article is on the filing of federal individual extensions except where
noted otherwise. ·
“Tax
professional” as opposed to “tax preparer” is referred to in this
article. My definition of “tax
professional” is someone who has extensive knowledge, education, and
experience in taxation and can provide tax consultation and planning services
in addition to preparing returns. Two
commonly recognized credentials held by tax professionals include CPA
(Certified Public Accountant) and EA (Enrolled Agent). CPAs and EAs are by no means the only tax
professionals out there and not all CPAs do tax-related work. With those preliminary
notes out of the way, I will now discuss what you should know about
extensions. What is an extension? First and foremost, it is
important to know that an extension is an extension of time to file an income
tax return, not an extension of time to pay the tax due. Unfortunately, many taxpayers miss the part
about it not being an extension of time to pay, perhaps due to wishful
thinking. Beginning in 2006 for the
2005 tax year, there is only one extension available for individuals – a six
month extension. Prior to this year,
there were two federal individual income tax extensions that could be filed –
an “automatic” four month extension and a second extension, an application
for an additional two months. With the new automatic six
month extension, you must file the extension form and pay your best
estimate of the tax that will be due for the return by April 15th. If you do not pay an estimate of the tax by
April 15th, you may find yourself subject to interest and penalties for
underpayment of tax. Why should I extend? The Internal Revenue
Service prefers that you file a complete and accurate return. A return you have to rush through, do not
have all information for, or make estimates of figures for is unlikely to be
complete and accurate. Thus, it is
better to file an extension if you are approaching April 15th and you do not
have all information needed or otherwise cannot file complete and accurate
returns. If you use a tax
professional and you are getting your tax information to him or her just a
few weeks or so before April 15th, do not be surprised if he or she indicates
an extension will need to be filed.
You are more likely to have a complete and accurate return if your tax
professional is not trying to rush to make the April 15th deadline. A few more comments for
those of you who use tax professionals.
If it is approaching the tax deadline and you have not yet contacted
your tax professional, do not be surprised if he or she is unable to speak
with you when you call his or her office.
Also, do not assume that just because you used his or her services
last year they will file an extension for you without you specifically
requesting it. Tax professionals are
very busy dealing with many clients and working long hours all of tax season
and they get even busier as April 15th approaches. Moving forward, you should consider getting
in contact with your tax professional’s office well in advance of the tax
deadline to determine what he or she needs to file an extension, if
necessary, and prepare your taxes. In addition to having a
complete and accurate return, there are certain planning opportunities that
can be taken advantage of if you or your tax professional is not forced to
rush through your return. One example
is funding certain retirement plans such as SEPs and Keogh Plans – these can
be funded for the prior year through the extended deadline of the return that
falls in the current year. Some plans,
such as a SEP, can actually be established for the prior year up through the
extended due date of the tax return.
It is important to note that traditional and Roth IRAs need to be
funded by April 15th to qualify as contributions for the prior year. For more information on such planning opportunities
for the year just past as well as the current and future years, you should
consult with your tax professional. What are the common concerns over extending? As referenced earlier,
many individuals are adverse to even the idea of extending due to concerns
such as being “flagged” as a late filer, being assessed penalties, or being
more likely to be audited. Filing an
extension in and of itself is not going to raise any “red flags” or cause
problems as long as your extension is timely filed and the tax due is paid by
April 15th. As for being audited, you
are more likely to be audited if your return is incomplete, includes
estimated figures, or is inaccurate. Another concern
individuals have is that it will cost them more to file an extension. The IRS does not charge for filing an
extension. Your tax professional may
charge you for doing so, but the fees charged most likely will be far
outweighed by the benefits of the return being complete and accurate. Incomplete and/or inaccurate returns can
result in you being contacted by the IRS and generally require that an
amended return be filed. Your tax
professional will likely charge you for preparing an amended return. If additional tax is due, penalties and
interest may be assessed. A complete
and accurate return is much less likely to result in any correspondence from
the IRS. Additionally, it includes an
accurate tax liability, which means lower taxes or reduced penalties and
interest as related to an understated tax liability. Like with many things in life, it is better
to do something right the first time as there is more time, effort, and
expense associated with having to correct something later. Yet another reason that
some individuals do not want to extend is because they are in the process of
buying a new home or refinancing and their lender is requesting a copy of
their tax return. Many lenders will
accept a copy of an extension along with copies of documents substantiating
income (W-2s, 1099s, K-1s, etc.) and copies of the prior year tax
returns. What information is needed to file an extension? You will need your general
taxpayer information, which includes your name, name of your spouse if
married and filing a joint extension, your social security number, your
spouse’s social security number (if applicable), and your complete
address. To avoid potential delays in
the processing of your extension, special attention is required if any of the
following apply: your name has changed
due to marriage, divorce, etc.; your address has changed since you last filed
a tax return; or you want to have correspondence related to your extension
sent to your tax professional or otherwise.
You should refer to the instructions for the extension form to properly
address any of these items. There is not much other
information needed. The items needed
for the tax year that the extension is for are an estimate of your total tax
liability and the total tax paid. The estimate
of the total tax liability is the more difficult of the two. You need to come up with your best estimate
of what the tax liability is. The IRS
instructions for the completion of Form 4868, “Application for Automatic
Extension of Time to File U.S. Individual Income Tax Return” clearly
state: “Make your estimate as accurate
as you can with the information you have.
If we later find that the estimate was not reasonable, the extension
will be null and void.” If that were
to be the case, your return would be considered late. A late filed return is subject to late
filing and late payment penalties and interest. How do I file an extension and, if applicable, pay
the (estimated) tax due? Either you or your tax
professional can prepare and file your extension. The methods for filing it include (1.)
e-file by computer using tax software, (2.) e-file and pay by credit card, or
(3) filing a completed paper Form 4868.
Regardless of who is going to prepare and file your extension, the
information discussed in the previous section will be needed. Thus, if you use a tax professional, you
need to get in touch with him or her in advance of the tax deadline to ensure
that he or she has that information. As for paying the
(estimated) amount due, you can do so via electronic funds withdrawal (EFT,
from a checking or savings account), credit card, or check. The EFT option can be used if you e-file by
phone or e-file by computer. You will
need to enter additional information when filing the extension to include AGI
(Adjusted Gross Income) from your prior year tax return and the routing and
account numbers for your bank account.
Payment by credit card can be done via one of several service
providers, each of which charge a convenience fee based on the amount of the
tax payment being made. Payment by
check can be made if you e-file by phone, e-file by computer, or file a paper
extension form. More detail about
these payment options is included in the instructions for Form 4868. It should be noted that if
you are a taxpayer that makes or should be making estimated tax payments, you
should compute and timely make those payments for the current year even if
you filed an extension. The federal
income tax system is a “pay as you go” system and if you are self-employed or
otherwise have income that results in a tax liability that is not paid via
withholding, you may be required to make estimated tax payments throughout
the year. If you are not sure if this
applies to you, it is recommended that you research this topic or consult
with a tax professional. What about state, local, and other income tax
returns? Some states will accept
the federal extension while others require that you file an extension
document with them. In Conclusion Whether you prepare your
own taxes or work with a tax professional, I hope that you have a better
understanding of what an extension is, when it should be considered, and what
is involved in completing and filing one.
If it is close to the April 15th filing deadline and you have not
finished or even started preparing your returns, you should consider filing
an extension. This will allow
additional time to ensure that the returns are complete and accurate and, in
turn, should reduce the stress associated with filing your taxes. By Tiffany J. Morisue,
CPA, e-mail: tiffany@abcsolutionsohio.com |
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