03/ 31/ 2008
by Charles R. McConnell
In recommending a tax filing extension under any circumstances it's necessary to first dispel a common misconception: that filing for an extension is an automatic red flag to the Internal Revenue Service, making the taxpayer more vulnerable to an audit. This fear has no basis in fact. Roughly nine million taxpayers receive extensions each year, and the IRS has nowhere near the resources to audit even a limited portion of these. What often does set off an audit for a small business, completely independent of whether there's been an extension, are omissions, mistakes, or claiming levels of income or expense that the IRS considers inconsistent with those to be expected of the kind of business that's reporting.
When can it be appropriate to consider an extension? Say you've put off taking care of taxes, and just as you're digging into the task a new customer comes along with a potentially big deal that requires an extensive detailed proposal from you. Where does your immediate attention go? It makes sense to push taxes aside for a while via an extension and concentrate on new business. Maybe you should have done your taxes earlier, but hindsight is always 20/20.
Many businesses obtain extensions because they've been unable to get all their tax records together in time. This is sometimes a result of procrastination, but it can also be legitimate when one is waiting, for example, for another person's partnership return to be completed. Also, if you're just getting into the use of tax-preparation software and feeling your way through the process, you might think about an extension to buy some time and flexibility, and lessen the chances of errors or omissions that can occur when the task is rushed.
An extension is more important to some businesses, as it gives them more time to come up with the money to fund retirement plans such as SEP (Simplified Employee Pension) plans or other company-contributed Individual Retirement Accounts (IRAs). This way it's not necessary to come up with the money for the plan contribution until the extension deadline. Even if you don't know whether you'll be able to make a retirement plan contribution, the extension provides the time and flexibility to decide what to do. Also, it's best to estimate your tax liability initially as though you plan on making the maximum allowed retirement plan contribution.
Obtaining an extension for tax filing is a fairly easy process. This is done by submitting IRS Form 4868, the Application for Automatic Extension of Time to File U. S. Individual Income Tax Return, a very short form despite its lengthy name. The extension period is six months. Before 2006 the standard extension was just four months, after which it was necessary to reapply for an additional two months if needed. Now all extensions provide six months upon a single filing. Form 4868 can be obtained at www.irs.gov, and is included in most tax-preparation software. Completing the form requires little more than providing heading and identifying information, one's estimated tax liability and the amount being remitted with the application. It's not necessary to explain why the extension is desired.
Note the reference to the amount being remitted with the application. An extension is an extension on filing, not on paying. It's necessary to make a good-faith estimate of what your tax liability is likely to be and to pay that amount by the mid-April tax deadline. Otherwise, late-payment penalties and interest begin to accrue.
You can file for an extension electronically or by ordinary mail. If by mail, the estimated tax liability must accompany the application. If filing electronically, it's permitted to use credit cards to pay the estimated liability.
For some businesses, filing for an extension is a normal step simply because of the increased options and flexibility it provides. Even if your taxes are done on time it's not necessary to file by April 15 if it appears as though an extension might have some advantages.
The normal tax deadline is just a few weeks away, and certainly some have done little or nothing to prepare. Time may be too limited to do everything that tax preparation requires or to learn how to properly use tax-preparation software. Also, at the present time the majority of accountants and tax attorneys are unable to take on new clients. A six-month filing extension could be the appropriate short-term stress reliever.
But don't forget that six months can fly by almost unnoticed. Enjoy the freedom the extension provides to do the job right and file an error-free return, but don't let Oct. 15 become another crunch deadline.
