By Ken Berry
As you're nearing the tax return finish line, you probably have some clients who are stragglers or haven't "checked in" yet. Fortunately, you can still rely on the automatic tax filing extension to bail procrastinators out of a jam. Here's some valuable information to pass along to your clients.
The due date for filing 2011 federal income tax returns is April 17, 2012, but that deadline isn't etched in stone. You can buy yourself more time by filing Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return, by April 17. This provides an automatic extension for filing your return for six months until October 15, 2012 – with absolutely no questions asked by the IRS!
Of course, an extension to file is NOT an extension to pay the tax that's due. You still have to pay estimated tax in a timely manner to avoid penalties and interest charges.
Why would you need a filing extension? Typically, it's used by taxpayers who simply couldn't get their act together in time. But here are few other common reasons for seeking an extension:
1. You don't have all the information you need for your return or it's been lost or misplaced. For instance, delays may be caused if you haven't received a K-1 stating income received in 2011 from a pass-through business entity.
"Frequently, an extension is needed because the business or partnership hasn't completed its own return", says Chris Hesse, a partner in CliftonLarsonAllen's federal tax resource group in Minneapolis, Minnesota. "This has become common because pass-throughs are being used to avoid the double taxation issue. The client must make a payment based on a reasonable estimate."
2. Circumstances dictate a delay. Even if you fully intended to file your tax return by April 17, sometimes life gets in the way. If there's been an unexpected illness or death in the family, you might not able to file on time. Similarly, a natural disaster can cause interruptions, although the IRS usually offers relief to those in harm's way.
3. You don't have the cash on hand for a retirement plan contribution. If you're self-employed, you might be using a Keogh plan or SEP to save for retirement. The annual contributions reduce your tax liability, but only if the deposits are made on time, notes Hesse. He says that filing for an extension effectively gives you an extra six months to come up with the money.
4. Obtaining an extension might reduce your tax liability. For example, if you converted a traditional IRA to a Roth in 2011, you must pay tax on the entire account balance at the time of conversion. But the value of the account may have declined since then. By recharacterizing your Roth back into a traditional IRA before you file your tax return, you can avoid an unnecessary tax "overpayment."
5. You're concerned about tax audits. There's a school of thought that filing for an extension reduces your chances of being audited. Here's why: Normally, IRS auditors examine a certain percentage of returns to randomly check for tax cheats. If you obtain an extension, you might sidestep this auditing procedure entirely, thereby reducing your overall exposure to an audit.
In any event, if you don't pay the requisite amount of tax by the April 17 deadline, the IRS will impose a penalty of one-half percent each month on the amount of tax owed. And, if you fail to file a return by the October 15 extension date, the IRS will ramp up the penalty to 5 percent per month, up to a maximum of 25 percent.
As with your regular tax return, you can e-file your filing extension request or send it by snail mail. If you're going to a US Post Office, we recommend using certified mail so you can prove to the IRS that you requested the extension on time.
How do you know how much you have to pay with the filing extension application? It's not an exact science. Hesse says that his firm refers to figures in prior returns to help arrive at a reasonable amount. Contact your CPA immediately for guidance.