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Time To File An Extension? Avoid These Two Mistakes.

  • 26 February 2014
  • Author: Cari Holbrook
  • Number of views: 3983
  • 0 Comments
Time To File An Extension?  Avoid These Two Mistakes.

It’s that time of year in which you’re either feeling good about being ahead of tax season or you’re nervously planning a way around the impending deadline. If you’re in the latter situation, you may be considering filing an extension. But, before you do, please note the following two major mistakes business owners often make when deciding to file an extension.

Mistake 1: Filing an extension in order to avoid an audit

It’s a well-spread myth that taxpayers who file early have a higher chance of an audit. And, therefore, that filing an extension means that procrastination could pay off in a lower audit risk. However, that’s simply not true. In fact, audits can – and often do – happen up to two or more years after the tax return date. And, for errors it considers “substantial,” the IRS maintains the right to audit up to six years after the return date. According to the IRS, the real determining factors for whether or not you’re audited are primarily:

1.     Your score based on the Discriminant Inventory Function System (DIF), which is assigned to individual and some corporate tax returns once they’re filed.  The DIF formula is closely guarded, but likely triggers include major income changes and income level (the higher your income level, the more likely you are to be audited). 

2.     Discrepancies between your return and third-party documentation, such as Forms 1099 and W-2. We encourage you to double check – even triple check – your math, and ensure that you and your vendors, contractors and clients (when applicable) are on the same page. The IRS does not value sloppy returns.

Whether you file by the original or the extended due date, these two factors have no impact on your likelihood to be audited.

Mistake 2: Using an extension to “buy time” on paying your taxes

If you need more time to pay your taxes, an extension won’t help. An extension is a request for more time to prepare and file the tax return, not for more time to pay taxes. In fact, if your withholdings, estimated payments and extension payment don’t equal or exceed 90 percent of the total tax liability, the IRS could deem your extension invalid. At that point, you will receive a bill for the balance due and will be charged a 5 percent per month penalty (up to 50 percent) for late filing as well as interest. For a taxpayer owing $10,000, that’s $500 per month in late fees. Include at least 90 percent and you’ll still be subject to a late payment penalty on the remaining amount, which is 0.5 percent per month (up to 25 percent) of the amount due.

If you owe less than $50,000 and find that you need extended time to pay, you can apply for a monthly payment plan through an IRS installment agreement. Either apply online at the IRS website or contact us for options.   

Ways to File Your Extension

Traditionally, extensions can be filed by submitting Form 4868 with a check or money order, by April 15 or by your fiscal year tax deadline, if it differs from April 15. (Extension requests for corporations, partnerships, REMICs and certain trusts can be made with Form 7004.) However, using IRS e-file to file a paperless extension or tax return may be a better option. That’s because the IRS itself admits processing e-file returns is faster and more accurate than processing paper returns. What’s more, you can pay with credit card (additional fees involved) or electronic funds transfer when you e-file.

Contact us for specific help on weighing your extension options, preparing yourself for a possible audit, and understanding tax payment implications and how they could affect you and your business. 

Image credit: donskarpo / 123RF Stock Photo

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