Tax Professional Services – As the tax filing deadline approaches, many procrastinators and those who are not actually ready to file their taxes become stressed and panicked, trying to meet a deadline that may be impossible.
Many would rather rush to prepare their returns than file an extension. Common concerns include, but are not limited to, being flagged as a late filer, being penalized, or potentially being audited.
If you are one of these people, I hope I can put your mind at ease and let you know what extending your tax refund really means and its benefits.
A few notes before starting. This article is written with the assumption that the tax year is the same as the calendar year as experienced by most individual taxpayers.
If the stated tax deadline falls on a holiday or weekend, then the deadline is actually the following working day.
The focus of this article is on individual federal extension applications unless otherwise noted.
Tax Professional Services
What is meant by “tax professional” and not “tax expert” in this article. My definition of a “tax professional” is someone who has extensive knowledge, education, and experience in the field of taxation and can provide tax planning and consulting services in addition to preparing returns.
Two common credentials held by tax professionals include CPA (Certified Public Accountant) and EA (Enrolled Agent). CPAs and EAs are not the only tax professionals out there and not all CPAs do tax-related work.
With those initial notes out of the way, I’ll now discuss what you need to know about extensions. What is an extension?
First and foremost, please note that the extension is an extension of the time for submitting the Income Tax Return, not an extension of the time for paying the tax owed. Unfortunately, many taxpayers miss the part about no extension of payment time, perhaps just because of wishful thinking.
There are two federal individual income tax extensions that can be filed. The first extension, which is “automatic,” is due by the April 15 tax deadline and is a four-month extension of the filing deadline. So, if you file for this first “automatic” extension, you have until August 15 to file your income tax return. Your best estimate of taxes due on your actual return is still due by April 15th.
The first extension is “automatic”, that doesn’t mean it just happens – you have to actually apply for an extension. There are various ways to do this that are convenient and will be discussed later. The reason it is called “automatic” is that you do not have to provide an explanation for why additional time is needed to file.
The second extension is not as “automatic” as the first. If you are unable to complete your return by the first extension deadline of August 15, you can “apply” for an additional two months.
A second extension is considered an “application” because you need to provide a good reason why you need the additional two months to apply. You must demonstrate that you made reasonable efforts to complete your return within the initial four-month extension period or that you have extenuating circumstances.
If the reason is simply for your convenience, your request may be denied. If your application is denied, your return will be due immediately or within a 10 day grace period. If you do not submit your first extension on time, a second extension will only be approved if undue hardship occurs.
Between the two extensions, you are given up to six additional months to file beyond the April 15 tax filing deadline. Six months is generally the maximum total time a return can be extended by law.
Why should I update? The Internal Revenue Service prefers that you file a complete and accurate return. Returns that require haste, do not have all the information, or make numerical estimates are likely to be incomplete and inaccurate. Therefore, it is better to file an extension if you are approaching April 15 and you do not have all the necessary information or cannot file a complete and accurate return.
Services of a Tax Professional
If you use the services of a tax professional and you submit your tax information to him just a few weeks before April 15, don’t be surprised if he indicates the need to file an extension. You’ll likely get a complete and accurate return if your tax professional isn’t trying to rush the April 15 deadline.
A few more comments for those of you who use a tax professional. If the tax deadline is approaching and you haven’t contacted your tax professional, don’t be surprised if he or she is unable to speak with you when you call his or her office.
Also, don’t assume that just because you used their services last year, they will apply for an extension for you without you specifically asking for it. Tax professionals are extremely busy dealing with multiple clients and working long hours throughout tax season and they become even busier as April 15 approaches.
Going forward, you should consider contacting your tax professional’s office well before the tax deadline to determine what he or she will need to file an extension, if necessary, and prepare your taxes.
In addition to obtaining a complete and accurate return, there are certain planning opportunities that can be taken advantage of if you or your tax professional are not forced to rush through a return.
One example is funding certain pension plans such as SEPs and Keogh Plans – which can be funded for previous years through extensions of repayment deadlines that fall in the current year. Some plans, such as SEP, can actually be set for the previous year until the tax return due date is extended.
It’s important to note that traditional and Roth IRAs must be funded by April 15 to qualify as a contribution for the prior year. For more information regarding planning opportunities for the past year as well as current and future years, you should consult your tax professional.
What are common concerns about renewals? As mentioned previously, many individuals are opposed to the idea of an extension due to concerns such as being “flagged” as a late filer, being charged with a penalty, or being likely to be audited.
Filing an extension by itself will not raise any “red flags” or cause problems as long as your extension is filed on time and any taxes due are paid by April 15th. As for getting audited, you will most likely be audited if your return is incomplete, includes estimated figures, or is inaccurate.
Another concern individuals have is that it will cost them more to apply for an extension. The IRS does not charge a fee to file an extension. Your tax professional may charge a fee for doing so, but the fees charged will likely far outweigh the benefits of a complete and accurate return.
An incomplete and/or inaccurate return may result in you being contacted by the IRS and usually requires filing an amended return. Your tax professional will most likely charge you to prepare an amended return. If additional taxes are due, penalties and interest may apply.
Complete and accurate returns are less likely to result in any correspondence from the IRS. Additionally, it includes accurate tax liabilities, meaning lower taxes or reduced penalties and interest associated with understated tax liabilities. As with many things in life, it is better to do things right the first time because there is more time, effort and expense associated with it!
to fix something later.
Yet another reason why some individuals don’t want to renew is because they are in the process of purchasing a new home or refinancing and the lender is asking for a copy of their tax return. Many lenders will accept a copy of the extension along with copies of documents proving income (W-2, 1099, K-1, etc.) and a copy of the prior year’s tax return.
Apply for an Tax Extension
What information is required to apply for an extension? You will need your general taxpayer information, which includes your name, your spouse’s name if married and filing a joint extension, your social security number, your spouse’s social security number (if applicable), and your complete address.
To avoid potential delays in processing your renewal, special attention is required if any of the following occurs: your name changes due to marriage, divorce, etc.; your address has changed since the last time you filed your tax return; or you would like correspondence regarding your extension to be sent to your tax professional or vice versa. You should refer to the instructions on the renewal form to properly handle these items.
Not much other information is needed. Required items for the tax year to be extended are an estimate of your total tax liability and total taxes paid.
Estimating the total tax liability is the more difficult of the two. You need to provide your best estimate of the tax liability. The IRS instructions for completing Form 4868, “Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return” clearly state: “Make your estimate as accurate as possible given the information you have.
If we later find that the estimate is unreasonable, the extension will be null and void.” If so, your return will be considered late. Returns filed late will be subject to late filing penalties and penalties and interest.
How do I apply for an extension and, if applicable, pay the (estimated) taxes due?
You or your tax professional can prepare and file your extension. Methods for submission include e-file via telephone, e-file via computer, or filing form 4868 which has been completely filled out.
Regardless of who will prepare and submit your extension, the information discussed in the previous section will be required. Therefore, if you use the services of a tax professional, you need to contact him before the tax deadline to ensure that he has the information.
E-file over the phone is a very convenient option if you want to file your own extension. Form 4868 and its instructions can be easily downloaded from www.irs.gov.
After reviewing the form instructions, use Form 4868 as a worksheet and then call the toll-free number in the instructions. You will be asked for information from the completed form and given a confirmation number at the end of the call. To e-file by phone, you must have already filed a federal return for the previous tax year.
Meanwhile, to pay the (estimated) amount that must be paid, this can be done via electronic withdrawal (EFT, from a checking or savings account), credit card, or check.
The EFT option can be used if you e-file via telephone or e-file via computer. You will need to enter additional information when applying for an extension to include your AGI (Adjusted Gross Income) from the previous year’s tax return and your bank account routing and account number.
Credit card payments can be made through one of several service providers who each charge a convenience fee based on the amount of tax payments made. Payment by check can be made if you e-file by phone, e-file by computer, or submit a paper renewal form. More details about these payment options are included in the instructions for Form 4868.
Please note that if you are a taxpayer who makes or is supposed to make estimated tax payments, you must calculate and make those payments on time for the current year even if you have applied for an extension.
The federal income tax system is a “pay as you go” system and if you are self-employed or have income that results in a tax liability that is not paid through withholding, you may be required to make estimated tax payments throughout the year.
If you are unsure whether this applies to you, it is recommended that you research this topic or consult a tax professional.
For more information on filing a second extension, please see the instructions on Form 2688, “Application for Additional Extension of Time to File a U.S. Individual Income Tax Return” which can be easily downloaded from the IRS website at www.irs.gov.
Income Tax Refunds
What about state, local and other income tax refunds? Some states will accept federal extensions while others require you to file extension paperwork with them. Ohio accepts federal extensions and does not require you to send them a copy, although you must send it in the form of taxes due, if applicable, by April 15th.
If you live in a state with a city or other local income tax, you may need to apply for an extension to the county (or county) for which you are responsible. Further discussion of state and city filing requirements is beyond the scope of this article as they vary from state to state.
Contact the respective tax department or your tax professional for further details. As with federal extensions, you usually must pay any state or local taxes due at the time the extension is filed.
In conclusion
Whether you prepare your taxes yourself or work with a tax professional, I hope you have a better understanding of what an extension is, when it should be considered, and what is involved in completing and filing an extension.
If the April 15 filing deadline is approaching and you haven’t completed or even begun preparing your return, you should consider filing for an extension. This will allow additional time to ensure that the return is complete and accurate and, in turn, will reduce the stress associated with filing your taxes.
