What You Need to Know About Tax Extensions
The federal tax return filing deadline for tax year 2016 is Tuesday, April 18th, 2017. What should you do if you can’t meet the IRS filing deadline? Find out how to file an extension on your 2016 tax returns with these tips from acclaimed Southern California CPA, Phil Liberatore.
Since 1955, “Tax Day” in the United States has been April 15th, or the next business day if it falls on a weekend or holiday. This year, Tax Day falls on April 18th, 2017. Despite the fact that taxes are essentially due on the same day every year, many people still find themselves scrambling to get their records together and file their taxes by the deadline.
Fortunately, the IRS allows taxpayers to file for a six-month extension if they need more time to prepare their tax return. You can obtain an extension for any reason and the IRS grants them automatically, as long as you complete the proper form on time.
What are the benefits of filing an extension?
Filing a tax extension is free, easy and automatic: Just submit Form 4868 electronically or on paper by the April filing deadline.
Not only will you gain six months to file, you’ll relieve the stress that often accompanies trying to pull everything together by tax time. More time, and less stress, means you’ll be able to thoroughly review your return and ensure you’re taking advantage of all the tax benefits available to you.
An extension can also benefit you when you have missing or inaccurate information in your financial records. You can’t file an accurate return if you don’t have all the information you need or if what you have is incorrect. It’s not unusual for some information returns, such as a Schedule K-1 or Form 1099, to arrive too late to allow you to complete your tax return by the April deadline. The IRS does impose deadlines for filing information returns, but extensions are frequently granted. These extensions can be for 30 days or six months, depending on the return.
Why is it a good idea to file for an extension?
It’s a good idea to file for an extension to avoid failure-to-file penalties that can add up to 25% of the tax due – and possible late-filing penalties that can mount up at a rate of five percent of the amount due with your return — for each month that you’re late.
For example, if you owe $2,500 and are three months late, the late-filing penalty would be $375. If you’re more than 60 days late, the minimum penalty is $100 or 100 percent of the tax due with the return, whichever is less. Filing for the extension wipes out the penalty.
If you file an extension but miss the extended deadline, you will be subject to this penalty. Keep in mind that filing an extension when you owe taxes only gives you more time to file, not more time to pay – your payment is still due at the April deadline.
If I file for an extension, how long is it good for?
If you filed an extension by April 18, 2017 (2016 tax year deadline), it buys you an extra six months, pushing your filing deadline to October 17, 2017.
Again, we must reiterate an extension of time to file your return, does not mean an extension of time to pay your taxes. If you expect to owe money, you’re required to estimate the amount due and pay it with your Form 4868. As long as you file this form, the extension will be granted automatically.
What if I don’t file my taxes by the deadline and don’t file for an extension?
The consequences differ depending on whether you owe the IRS money or the IRS owes you a refund.
If you are getting a refund
This is one of the great little secrets about the Federal tax law. If you have a refund coming from the IRS—as about three out of four taxpayers do every year—then there is no penalty for failing to file your tax return by the deadline, even if you don’t ask for an extension. As noted below, the penalty for filing late is a percentage of the tax owed with the return. And, even 100 percent of $0 is $0. However, this might not be the case for state taxes.
That’s not to say there aren’t very good reasons for filing on time. Even if you have a refund coming, consider the following:
- You can’t get your money back until you file, so file as soon as you can.
- The statute of limitations for the IRS to audit your return won’t start until you actually file your return. The sooner you file, the sooner the clock starts ticking.
- Some rather arcane elections must be made by the due date, even if you have a refund coming. This applies to a very tiny percentage of taxpayers.
If you have a balance due
If you haven’t paid at least 100 percent of the tax you owe by April 18, 2017 you’ll end up owing a late payment penalty of 0.5 percent per month until the tax is paid. The maximum late payment penalty is 25 percent of the amount due. You’ll also owe interest on whatever amount you didn’t pay by April 18th.
If you didn’t get an extension, you are also looking at a late filing penalty of five percent of the unpaid tax per month plus interest. The maximum late filing penalty is 25 percent of the amount due.
When shouldn’t I file an extension?
Many people file for an extension because they owe taxes and are unable to pay them.
“Inability to pay is the worst reason to file an extension,” warns Cole. An extension gives you extra time to file, but not extra time to pay. After you file an extension, if you owe taxes when you file your return, you might also have to pay penalties and interest on the tax due.
If you file an extension for other reasons, you must determine as best you can, whether you’ll owe money or get a refund. If you expect to owe money, you should pay that amount when you file your extension form.
What if I owe the IRS but can’t pay?
Instead of requesting an extension when you can’t pay your tax due, the IRS offers some payment alternatives. If you find yourself in this situation, you have a few options available, ranging from credit card payments, to installment agreements, to “offers in compromise.”
You can also simply file your return and wait for the IRS to bill you. Don’t be surprised if the bill includes interest and penalties. There is also a form that can be filed to request an extension of time to pay your tax, but the legal requirements are strict. Keep reading for more details.
Can I pay my tax by credit card?
Yes, you can pay your tax bill with credit in a variety of ways.
Credit card and bank loans are both payment options. You can apply for a bank loan, home equity loan or take a cash advance on a credit card to pay your tax bill.
Third party providers like Official Payments Corporation are also available to facilitate using a credit card to pay your tax bill. These companies charge a convenience fee (around 2.5% of the amount being paid) for their service. That fee is in addition to any interest and finance charges your credit card company may charge you. Some folks seem to think that paying with a credit card is a cool way to earn credit card points. However, the fee for using the card is likely to outweigh the value of the points.
Can I pay my tax in installments over time?
You can request a short extension to pay in 60 to 120 days, and you will still pay penalties and interest, but at a lower rate. The IRS also offers installment agreements for taxpayers who can’t pay their taxes when they are due. An installment agreement lets you pay a set amount per month until the tax is paid. Finally, the IRS suggests you consider paying your tax due with a credit card or loan. In many cases the interest on these accounts will be lower than the combined penalties and fees you’ll pay the IRS.
If you find yourself in the unenviable position of owing more than you can afford, you should still file a return. That protects you from the late-filing penalty that otherwise would keep digging you deeper into a hole. That penalty mounts up at a rate of 5 percent of what you owe per month. You avoid that penalty by sending in your return, even if you don’t enclose a check for the balance due.
How do I sign up for an Installment Agreement?
Attach a Form 9465 Installment Agreement Request to your tax return asking the IRS to set up a monthly payment plan to pay off what you owe. That’s not as unusual as you might imagine, considering about 2.5 million taxpayers are paying off their bills under such an arrangement, and recently the IRS made it easier to qualify. In the past, before the IRS would okay an installment plan, the agency demanded a look at your finances—your assets, liabilities, cash flow and so on—to be able to determine how much you could afford to pay. That’s no longer required in cases where the amount owed is under $10,000 and the proposed payment plan doesn’t stretch over more than three years. You can also now apply online for the installment agreement. More details are available on the IRS website.
Don’t think the IRS is a patsy, though. You may be better off if you can borrow the money to pay your bill, rather than go on an installment plan which means, effectively, borrowing from the IRS. First of all, the IRS charges a $52 fee to set up an installment payment plan for direct debit; $105 for non-direct debit agreements. (For eligible low-income individuals, the fee is $43.) The IRS interest rate on late payments was 3 percent for the third quarter of 2015 and can change quarterly. That might not sound bad, but that’s not all you have to pay, either. There’s also a late-payment penalty of 1/4 of 1 percent a month. The 3 percent interest rate plus 1/4 of 1 percent a month adds up to the equivalent of 6 percent a year. Of course, that’s a lot better than most credit cards.
Does the IRS ever negotiate the amount owed?
An “offer in compromise” is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt. Under certain circumstances, the IRS is authorized to resolve a tax liability by accepting less than full payment. There are three circumstances under which the IRS is authorized to compromise:
- When there is doubt that the tax is correct
- When there is doubt that you could ever pay the tax in full
- When the tax is correct and you could pay it, but payment would result in an exceptional circumstance, economic hardship, or be unfair or inequitable
Form 656: Offer in Compromise Package should be completed to file an Offer in Compromise with the IRS. Included with the Form 656 package are Form 433-A, Collection Information Statement for Wage Earners & Self-Employed Individuals and Form 433-B, Collection Information Statement for Businesses. You may need to complete the appropriate Form 433 and should be prepared to provide other documentation and explanations as they are requested.
Various options are available for accepted Offers in Compromise requests, such as a reduced total payment and scheduled monthly payments. Defaulting on an accepted offer in compromise can result in the IRS filing suit against you and reinstatement of the original tax debt, plus interest and penalties.
Can I get an extension of time to pay my tax?
An extension of time for payment of tax can be filed with the IRS on Form 1127: Application for Extension of Time for Payment of Tax, but the legal requirements are strict:
- Form 1127 must be received by the IRS on or before the date that the tax is due.
- You must provide a complete statement of all your assets and liabilities at the end of the last month; and an itemized list of money you received and spent for the three months immediately prior to sending in the extension to pay request.
- You must demonstrate that paying the tax when due would result in undue hardship; simple inconvenience is not enough of a hardship to qualify.
- You need to show that paying the tax when due would result in a substantial financial loss and that you don’t have the cash, or can’t raise the money, by selling property or through borrowing.
When approved, extensions to pay are generally limited to six months. Plus, the IRS requires some acceptable form of security before granting an extension of time to pay. The security may be in the form of a bond, notice of lien, mortgage or other means, depending upon individual circumstances.
If you miss the deadline or do not file for an extension, it’s very important to file your taxes as soon as possible. Philip L. Liberatore and his highly experienced team of CPA’s can help you file fast and make the process as smooth as possible.
Regardless of whether you are due a refund or owe, there is another point to keep in mind: If you never file your return, there is no limit on how many years the IRS can go back to assess and collect tax. So, one way or the other, there are compelling reasons to get on with it and file your return. Philip L. Liberatore, CPA makes it so easy, there’s really no reason to wait. Contact us today to learn more about how we can help you.