Right around this time of year, the tax dance heats up and the pace gets frantic. It’s the time when tax professionals have to try to keep up with the frenetic twists and turns of emerging tax laws, deadlines, IRS announcements, and warnings.
But don’t finalize your tax return just because the April 15 tax-filing deadline is around the corner. Take a deep breath. Pause. Look everything over. If you’re still missing anything important, don’t file that tax return. Put it on extension.
Why? If you file your tax return now, with mistakes or incomplete information, you’re going to have to amend it. Normally, only a computer sees your return. When you amend, real people look at it. All of it. Not just the part you’re amending. So if you don’t want to deal with an increased chance of an audit, file it correctly in the first place.
When should you file for an extension?
You should file for an extension any time between April 1 and April 15. Use Form 4868 for your personal tax return, and use Form 7004 to extend practically everything else—partnerships, estates and trusts, gift taxes, etc. (Note: Calendar year corporations’ tax returns need to have been extended by March 15, so if you didn’t do that already, you’re late.)
Remember to also file extensions with your state. You can find state tax forms here.
What does the extension get you?
An extension buys you six more months (until October 15) to file your personal, 1041 estate, and gift tax returns. You will only get five extra months to file partnership returns because they’re due on September 15 of each year.
What doesn’t the extension get you?
Technically, these forms give you additional time to file your tax return—but not additional time to pay. The IRS says that you must pay the full amount of tax you expect to owe for 2012 by April 15. But in my experience, folks with businesses, those with large incomes and huge bills, and the chronically disorganized never have enough money by April 15.
What kind of trouble will you be in if you can’t pay?
None, really. Send in whatever you can afford on April 15 with your extension—at least $25. Whatever balance is left will earn a late payment penalty of one half of 1 percent per month (or 6 percent per year) and interest of about 4 percent per year. This is probably cheaper than your credit card or loan rates, so don’t stress over it.
Next, devote the next six months to two things:
1) Finish up your accounting and find all the paperwork you need so you can prepare your tax return(s) properly.
2) Earn money so you can pay off your 2012 tax obligation by October 15. You’ll find some of the savvier Internet entrepreneurs and brick-and-mortar businesses running tax sales during this time. What’s the purpose of these sales? They are purely to generate the funds to pay taxes. It’s a great idea. Just make sure you set aside money to pay the taxes on those profits as well.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.