Should I File for an Extension?
Many taxpayers pull all-nighters on April 14 and rush to the mailbox the next day to file their Form 1040 before the April 15 deadline. Many of those last minute filers believe that filing an extension will increase their risk of audit therefore, the last minute scramble. Many of those taxpayers also file those last minute returns without adequate review and full of errors caused by the rush.
The truth is that a hurriedly prepared return is at much greater risk of audit than an extended return. Errors stick out much farther than extensions.
The IRS recognizes that for many taxpayers, it just isn’t possible to file a complete and accurate return by April 15. This is especially true of entrepreneurs whose K-1’s from a partnership, LLC or S Corp have just arrived. That’s what extensions are for, so don’t be afraid to use them.
An Extension Doesn’t Mean You Can Wait to Pay
Getting an extension doesn’t mean you can delay payment of your taxes. To avoid penalties, it is necessary to have a reasonably clear understanding of your income and deductions before requesting the extension. Then, you should send an amount with your extension form equal to your estimate of the ultimate tax bill. You will avoid the late-payment penalty of 0.5% per month if you have paid in at least 90% of your total tax liability for the year. You will, however, owe interest on any amount that remains unpaid.
The extension will cover you for the steeper late filing penalty, which is set at 5% per month for any tax not paid by the due date.
Form to Use for Extension – Individuals
An individual taxpayer’s return is due on April 15. Form 4868 extends the due date for 6 months (4 months for US residents or citizens who are “out of the country” as defined by the IRS). The form requires very little time to complete, and is automatic. It doesn’t require IRS approval and no longer even requires your signature. The only information necessary is: Name, Address, Social Security number and Estimate of Liability.
Form to Use for Extension – Corporations
A corporation’s tax return is due on the 15th day of the 3rd month following year-end. That means that a calendar year return is due on March 15. That due date is typically more difficult for corporations than is the April 15 due date for individuals. Corporations can request an automatic 6-month extension (until September 15 for calendar year taxpayers) to file Form 1120 or Form 1120-S. Again, any balance owed must be paid with the extension or in this case deposited with your bank using a payment coupon on the same day the extension is filed.
Form to Use for Extension - Partnerships (Including LLC’s Being Taxed as Partnerships)
A partnership’s tax return (assuming a calendar year) is due on April 15. An extension request is made using Form 7004 and is valid for 5 months until September 15. While a partnership owes no tax and therefore has no payment to estimate with the extension, there are individual partners in need of some estimate of what will appear on their Schedule K-1. The individual partners need the information for inclusion in their own extension calculation.