Ignorance is Bliss? Need an Extension?

If you’re expecting that I’m going to remember to put you on extension, but you have not heard from me, you may be disappointed (and penalized). You can file your own extension. For individuals, the federal extension is Form 4868, and you may need to prepare a state extension as well. And no, I can’t answer ‘just one simple question’ about extensions. I’m currently charging $100 minimum for extensions to cover my computer fees, and pay for some follow up. This is in addition to the regular tax preparation fee for those who need extensions. If you’ve delivered your materials to me and I am unable to prepare your return on time, I may choose to put you on extension and then I won’t charge a fee.

If you’ve sent me your materials and you have not heard back from me—I don’t have your materials and I’m not going to prepare an extension for you. I have contacted everyone who is “on my list.” I had one envelope delivered to the old Berkeley address and wasn’t forwarded—thank goodness that client emailed asking about their returns! Just to reiterate, I’ve moved my office to Alameda—see the address and contact info at the bottom of this newsletter.

Estimated Payments for Many are Due April 16th

published April, 2012

You may have a requirement to make estimated payments for your 2012 taxes, and then again, you may not. The IRS has a “pay as you go” system where they ask us to make payments during the tax year. Corporations and Individuals have different due dates, and CA is not divided into four equal payments, but most calendar year people and entities have the first payment due April 15th, extended because it’s Sunday.

How do you know what to send in? The default amount is to pay ¼ of what you owed for the prior year. This may be problematic if we haven’t finished your return for the prior year! For corporations, the payment due for the minimum CA tax is $240, but may be more if you owed more money in the prior year.

What was your income in the first Quarter? If it’s less than last year, you may not need to send in as much as the prior year.

Oh, and individual returns or extensions are also due April 16.

Some of you know, Monday April 16 is Emancipation Day in Washington DC, and therefore a holiday, extending the deadline by ONE MORE DAY, but I don’t want to encourage waiting until the last minute, so I’m not going to mention that.

How to file your own Extension

published March, 2010

The day is getting close to file an extension. Corporations and LLC’s taxed as Corporations are DUE MONDAY MARCH 15th.

People are due Thursday April 15th.

If you don’t file an extension, you may receive a Penalty for Late Filing. For corporations, partnerships and LLCs (which are also partnerships), the extension form is 7004 and here’s the link: www.irs.gov/pub/irs-pdf/f7004.pdf You’ll need to decide which entity you are based on the return you file ­ S Corporations file an 1120S, and C Corporations file an 1120. Each has a different code to enter on the extension. You’ll also need to decide if tax is owed tentatively, and make a payment.

It is possible your extension may be invalidated if you don’t make a proper payment. The payment is made either through the on-line EFTPS system, or via Form 8109 coupon, the payment does not go with the extension form.

In California, generally the federal extension suffices—you don’t need to file a state extension, although if you owe California money, you pay WITH the extension. The California extension form is a payment voucher numbered 3539 and here’s the link: www.ftb.ca.gov/forms/94_forms/94_3539.pdf

Some states DO require a separate extension from the federal extension, in addition to the federal extension, like Washington DC.

If you want me to put you on extension, I’ll need an idea about your income for last year, and I’ll make an estimate of what you’ll owe. I will also send you an invoice for the minimum fee for your return. If you owe a payment, I will send you a payment coupon for the state or give you an amount to pay to the IRS.

Can I get an Extension?

published April, 2007

Yep.

The thing I’m supposed to say is “an extension to file is NOT an extension to pay.”

That means if you expect to owe tax for 2006, you should send a payment WITH the extension. There’s some possibility that if you don’t include payment, the government could invalidate your extension, which leads to a ‘failure to file’ penalty based on what you owe. It’s not clear how they decide if you willfully didn’t make a payment vs. you just didn’t know what you owed and you guessed wrong. To be honest, I’ve never seen them void an extension. But it could happen.

If you don’t pay what you owe, late payment penalty and interest will continue to accrue, even if you DID file an extension. Filing the extension only allows you to avoid the ‘failure to file’ penalty of 5% per month or part of month, up to 47.5% of the amount owed.

So, if you want me to file an extension, let me know, preferably BEFORE APRIL 13. I’ll be much more polite up to April 13–after that, I start to get stressed out (yes Virginia, even I get stressed out at some point!).

Let me know if you intend to make a payment with your extension; I can put you on extension electronically. Since my software charges me per social security number I “activate,” I’ll be sending a small bill to people I put on extension, to cover my fee. That way we’re ‘clean’ — if you go to someone else to get your return done, I’ve covered my costs. If you subsequently have Tax Buddha prepare your return, we credit what you’ve paid against the future return cost.

You can also do your own extension, look for Form 4868 at www.irs.gov If you successfully file a Federal Extension and DON’T OWE STATE tax, you don’t need to do a state extension (at least in CA). The federal extension covers you. If you DO owe state tax, you’ll need to look for Form 3519 at www.ftb.ca.gov. I’m told you can pay CA with a credit card (for a fee).


Avoiding an Audit by Filing an Extension

published February, 2007

Rumors of avoiding an audit by filing on extension are greatly exaggerated

The IRS selects returns for audit based on three criteria: The “DIF” Score, Randomly, and Document Matching. None of these methods have anything to do with the date you file. 

The DIF Score (Discriminate Index Function—now that you know what it stands for, is it any clearer?) is a “secret” statistical analysis of returns based on income and other factors—The IRS has and idea of what they expect you to be reporting based on your income. They won’t reveal their criteria for obvious reasons.

Sometimes “your number is up” and you get audited for no other reason than random selection. It’s not personal. It keeps people honest.

Document matching is where they take the 1099s and W-2s and whatnot, and match them to what you’ve reported. No problem if you report more income than appears on your 1099s, but it is a problem if you report less.

For stock sales, the IRS only gets the “sale” amount, they don’t get the cost—so the IRS is going to presume you bought your stock for $0 unless you report differently, so you need to report, even if you had a loss on sale of stocks. It can take the IRS up to three years to match documents, but they usually get around to it.

We at Tax Buddha recommend you report ALL your income, even if you don’t think you’ll get caught. “Missing 1099s” have a notorious way of appearing after the fact—for example when the person who paid you gets audited. You’re looking out for yourself when you report completely, plus, it’s the law.

If you actually do forget and find a 1099 or some other document after the fact, let us know so we can file an Amended Return for you. It is much better to discover your own mistake and take action to correct the error than to have the IRS discover it. You’re not going to jail if you’ve made an error. Of course if you forget that million dollars of income, the story might be different.