I just need more time! Tax extensions- what you need to know.

April 12, 2017

 Photo credit here

 

Sometimes, we just can’t get it all done by the deadline. We don’t have the paperwork, we’re traveling, we’re sick, we’re busy, or we just…didn’t. So, here are some important items to know about tax extensions!

 

When you file an extension, you receive an additional six months from the date of the extension filing to finish up your taxes. So, if you file it on April 15, you have until Oct. 15 to file – this year, the latest date to file taxes after being granted an extension is Oct. 16, 2017.  

 

If, you live abroad or are in active duty for the US military, you are eligible for an automatic 2-month extension to file and pay taxes that are due. The IRS rules are that you must be a U.S. citizen or resident alien and “on the regular due date of your return:

  • You are living outside of the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico, or

  • You are in military or naval service on duty outside the United States and Puerto Rico”. (See link here).

 

However, just because you received a six-month extension, doesn’t mean you don’t need to pay taxes by April 18th. The taxes are due and subject to interest and penalties if not paid by the deadline. That means you and your accountant need to already have a good idea of what you owe well before April 18 and should submit an estimated payment.  

 

Here’s a breakdown of the damage:

Interest:

Interest accrues on the unpaid balance and compounds daily from the due date of the return (without regard to any extension of time to file) until you pay the balance in full.

 

  • The interest rate is the federal short-term rate plus 3%, and the federal short-term rate is determined every three months (see the IRS website for the most recent interest rate).

Penalty:

There is a failure to pay penalty if you do not pay your tax by the due date.

 

  • The late payment penalty is 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%.

  • You won't have to pay the penalty if you can show reasonable cause for the failure to pay on time.

  • 10 days after the IRS issues a final notice of intent to levy or seize property, the 0.5% rate increases to 1% per month.

  • The penalty rate is 0.25% for each month or part of a month in which an installment agreement is in effect.

 

Speaking of installment agreements…if your tax bill is higher than what you can pay, you can request and normally receive an installment agreement with the IRS. There is a little additional paperwork, but worth doing if you are unable to pay it all now. We are always happy to help clients with this paperwork.

 

What happens if you just don’t file anything?

If you owe taxes, then you will have the above-mentioned interest and late payment penalty, potentially some sleepless nights, and also the Failure to file penalty. The penalty is pretty steep:

The combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25% (at five months), on any tax that was not paid after the tax due date. The maximum total penalty for failure to file and pay is 47.5% (22.5% late filing and 25% late payment) of the tax.

 

 

So, go get those documents and get it ready already!

 

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