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.
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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