Woburn, MA (PRWEB) April 3, 2006
Taxpayers unable to complete their tax returns by April 15 must file Form 4868, Application for Automatic Extension, with the IRS (available at http://www.irs.gov). Its important to note that when a person files for an extension, he or she is asking for more time to finish paperwork, not more time to pay any money that is due, explains Andrew Schwartz, CPA, founder of RealEstateProTaxes.com, an affiliation of CPAs throughout the country that specializes in tax planning and preparation for real estate professionals. If you owe taxes as of April 15th, expect to pay interest and possibly a penalty on the amount due.
Whether youre subject to a penalty depends on the amount of taxes owed after April 15th. Here are the basics:
Interest: Anyone who has a balance due to the IRS after April 15th will be charged interest by the IRS. According to the IRS' website, the current interest rate is 7%, which is a lot less than the rate charged by most credit card companies.
Failure to Pay Penalty: If you file for an extension, and you owe more than 10% of your final tax liability, expect to get hit with a “failure to pay” penalty that runs at 0.5% per month. Thats in addition to any interest youll owe on the balance due.
Failure to File Penalty: If you don't file an extension request by April 15th, the “failure to file” penalty runs at 5% per month, up to a maximum of 25% of the taxes owed. This penalty is equal to $50 per month on every $1,000 of taxes owed.
For example, if a person earns $100,000 this year and has a total federal tax liability of $20,000, they'll avoid the 0.5% per month failure to pay penalty as long as they end up paying less than $2,000 when they file a tax return later this year. By having 90% of their total tax liability paid by April 15th, filing an extension provides for an extra six months to come up with the remaining tax dollars owed at a relatively low interest rate. If no extension were filed, the penalty would be $100 per month on a $2,000 balance due.
Extensions Can Make Sense For Self-Employed Individuals
Self-employed individuals might benefit by filing for an extension as well. That's because they have until the due date of their tax return, including extensions, to fund their retirement accounts for the year. If an individual doesnt have a retirement plan set up yet, a SEP IRA can be established as late as the extended due date of their return, or October 15, 2006.
By filing a Form 4868 with the IRS, a person gets an additional six months to fund their retirement plan and deduct the contribution made on their prior year's return. One strategy common to self-employed individuals is to pay the full amount of taxes due with an extension, and then to fund their retirement plans prior to October 15th.
No Extenstions For IRAs and ESAs
Keep in mind that an extension does not give you any more time to fund your traditional or Roth IRAs and your Coverdell Education Savings Accounts (ESAs) for 2005. The due date for these tax-advantaged retirement plans and college savings accounts is April 17th this year, says Schwartz.
Does An Extension Increase The Chances of An Audit?
I have clients who are convinced that filing for an extension is a red flag with the IRS. And I have others who always file for an extension because they've heard that they're less likely to be audited by doing so. Personally, I've never seen any connection, explains Schwartz.
Cant Pay Your Taxes By April 15th?
What if someone needs more time to pay their taxes? If you owe so much taxes that you wont be able to pay them off by October 15th, one option is to enter into an installment arrangement with the IRS. This is done by completing and filing a Form 9465, and attaching the completed Form 9465 to the front of your federal income tax return. On this installment request form, you tell the IRS how much you can afford to pay each month and the day of the month that the payment will be made.
The IRS charges a fee of $43 to any taxpayer who enters into an installment arrangement. In addition, the IRS will charge interest at the prevailing federal rate (currently 7% per year), and a “failure to pay” penalty of 0.25% per month on the outstanding balance. Plus, failure to make a scheduled payment will cause the remaining outstanding balance to become immediately due.
Always Submit Your Paperwork On Time
The moral to this story is simple,” says Schwartz, “Since the failure to pay penalty is so much smaller that the failure to file penalty, always try to file all your tax returns and extension requests on a timely basis, even if you're unable to pay the full amount of the taxes due at that time.
Andrew D. Schwartz, CPA is the editor and a major contributor to http://www.REPtaxes.com, a website that provides income tax and financial planning information geared towards real estate professionals. Schwartz has provided financial planning advice in interviews with various media, including the Washington Post and Wall Street Journal. He is available for interviews.