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Accounting Best Practices Bay Area Business Magazine

BABM Magazine > Lessons Learned > Accounting > Tax Time

Accounting Best Practices

Tax Time is a Hair Raising Experience
Consider Extensions
By Paul Bayer
Published: February / March 2008

April 15th (March 15th for Corporations) often comes too soon for most taxpayers. When the pressure of filing your tax return by Tax Day is looming and you’re not ready, consider filing an extension. In recent years, the IRS has made it much easier to extend your return for six months. There are several benefits of extending your return.

  • You and your CPA will have more time to gather the data necessary to file a complete and accurate return.

  • There are no penalties or late fees for a timely filed extension as long as any tax liability is paid with the extension. Filing an extension does not have any adverse effect on you (the taxpayer). The IRS doesn’t automatically select extended returns for audit. You are at higher risk if you file an inaccurate return that you subsequently amend.

  • Filing an extension gives you up to six months to prepare and complete the return as if it has been filed on time. It does not, however, grant you any extension of time to pay the tax liability. This means estimating the tax liability so that a proper payment is made to the IRS and no interest is due. Your CPA can help estimate your tax liability based on the current data or based on your prior year’s liability.

There are a few times when the taxpayer has no choice but to file an extension. In some cases, the individual shareholder may be waiting for his form K-1 (Shareholder’s share of Income, Deductions, Credits, etc. for shareholders of LLC’s, Subchapter S Corporations, and Partnerships). In other cases, decisions made on your tax return may require information about your current year tax situation - so you may want to delay filing last year’s return until you have that current year information.

The automatic six month extension is filed using Form 7004 (Form 4868 for Individuals). It must be timely, filed on or before the original due date of the return. Also, to avoid penalties, the taxpayer must pay any tax liability at this time, even if you must calculate the liability using estimates. (Note: There are other rules for making minimum estimated payments throughout a tax year and not just when the return is due, so please seek guidance to ensure that penalties are minimized.) The extension can be filed at any time, so there is no reason to wait until April 15th if you know that you want to file for an extension.

Extra time to gather vital information may result in some additional tax savings by allowing you to search more thoroughly for deductions and credits. Below is one example where the automatic six month extension proved invaluable to a client in reducing his tax liability.

This was our first year working with this client and we were not engaged to work with them until late in the year. The client operates in an industry that, upon qualification, is eligible for certain tax credits. Until advised, the client had no knowledge of these tax credits, but was obviously very eager to obtain them. With the filing deadline fast approaching, we knew the client would require extra time to compile the data we would need to calculate the credit. Having never filed an extension before, the client was uncomfortable doing so, as he had heard extended returns were often “red flags” for IRS audits. We assured him that this was a myth and that extended returns are no more likely to be flagged for audit than those returns that were not extended. The automatic six month extension was filed and, over the course of the next few months, we were able to assist the client in assembling and substantiating the information needed to calculate the tax credit. Having this extra time to claim the credit resulted in substantial tax savings.

Another example of the advantages of extending a return relates to the self-employed or business taxpayer who wants to make a contribution to his Simplified Employee Pension Plan, but may not immediately have the funds available to do so by April 15th. To be deductible, the contribution must be made prior to the earlier of the due date for the return or the date the return is filed. Thus, by extending the return’s due date, the taxpayer has up to the date that the extended tax return is filed (assuming it is before that new due date) to make the contribution. The contribution deduction will always be disallowed if it is funded after the tax return is filed.

If you don’t feel comfortable with the numbers you have assembled, don't panic. Just make a good faith estimate and pay your taxes and file an extension by the original due date. This way you can take your time and be sure to file a tax return that is complete and accurate so that there will be no unexpected correspondence from the IRS.

Kingery & Crouse, P.A.

Paul Bayer is currently a member of the tax department and has many years of experience working in public accounting in both audit and tax. Prior to his public accounting career, he worked in the Corporate Controller’s division for MetLife where he specialized in Derivatives accounting and Private Placement Investments accounting. Kingery & Crouse, P.A. is a full service public accounting firm with a staff of 23 dedicated professionals providing tax and accounting services, including audits of SEC companies. You may contact Paul at (813) 874-1280 ext #247. Find us on the web @ www.tampacpa.com.

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