[April 9, 2009 – Nashville, TN] As April 15 approaches, two classes of small-business owners are likely to feel some panic: the procrastinators and the owners who don't have the money to pay their tax. All of them should consider using the IRS pressure valve -- the extension of the filing deadline.
If your return isn't ready, the worst thing you can do is to do nothing. You're better off getting an extension.
And not having the money to pay your tax isn't a valid reason to just let the deadline pass. Not filing or getting more time will only run up your bill with the IRS.
Many small-business owners blanch at the idea of an extension, fearing it will make them more vulnerable to a full-blown audit of their returns. But the last two years, about 10 million or about 7 percent of taxpayers filing 1040 forms obtained extensions, according to the IRS. There is no way the agency could audit that many returns.
Accountants generally dismiss the extension/audit link as a myth.
"The Internal Revenue Service provides for an automatic extension of time, using form 4868, in which to file the 2008 individual Federal income tax return. The extension period expires October 15, 2009. To prevent a penalty, taxpayers should estimate the amount of tax due and pay with the extension form." said Joe Edmonson, a BBB Accredited Business and Certified Public Accountant in Nashville, TN., who's been practicing for 40 + years.
Other owners are so comfortable with extensions that they obtain them as a matter of course. Some who have retirement plans known as SEPs, or Simplified Employee Pension, or SIMPLEs, short for Simplified Employee Pension, routinely get extensions because their prior-year contributions don't have to be made until the due date of the return -- which becomes Oct. 15 with an extension.
Spoor noted that some business owners get an extension, file their returns well before Oct. 15 and then use the refund money they get to make their prior-year contributions.
Extensions do buy taxpayers time to complete their returns, but getting an extension doesn't relieve you of the requirement to pay your taxes. Accountants and the IRS have a mantra: An extension of the time to file isn't an extension of the time to pay.
Still, the government is well aware that not everyone has the money to pay, especially now, when many companies are dealing with cash flow problems.
The IRS requires taxpayers who are seeking extensions to make a good-faith estimate of how much they owe when they complete Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The instructions for the form state that taxpayers are not required to pay their taxes now, although they warn that taxes not paid by the regular due date -- April 15 for most taxpayers -- will be subject to interest and possibly penalties as well.
Nancy Mathis, a spokeswoman for the IRS, said, "we recognize that these are difficult times for many people, who cannot pay. We urge them to come to us and work with us to set up a payment plan so they won't compound their problems with the penalties."
The failure-to-file penalty is the stiffest: 5 percent of the unpaid taxes for each month or part of a month that a return is late, up to a maximum of 25 percent of the unpaid amount.
There's also a failure-to-pay penalty of 0.5 percent of the unpaid taxes for each month or part of a month after the due date. And, on top of that, there's interest on the unpaid amount; as of April 1, the government will charge 3 percent, compounded daily.
Mathis said the IRS can waive penalties. The agency's Web site says, "you will not have to pay a failure-to-file penalty if you can show that you failed to file on time because of reasonable cause and not because of willful neglect." In other words, procrastinating or worrying about having the money to pay won't excuse you from penalties.
The IRS cannot by law waive interest due on unpaid taxes, Mathis said.
To get an extension, a taxpayer needs to complete Form 4868 and send it either electronically or by regular mail or overnight delivery service before the April 15 deadline. It's a good idea to get proof of mailing either from the post office or the delivery service you use.
Form 4868 is just about as short as an IRS form can be. You need your name, address, Social Security number and estimate of your tax liability.
If you send a payment, you can either enclose a check with a paper Form 4868, or, no matter which way you file, use one of the payment services listed in the Form 4868 instructions.
For more information about extensions, and to download Form 4868, owners should visit the IRS Web site, www.irs.gov.
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