Q: April 15 is almost here, and I’m missing a piece of information I need to finalize my tax return. I know I’m going to owe the IRS some money. I also know I’m not going to have all the pieces in place to get my return completed. What’s the best course of action? A: If you don’t have all your tax return information needed to file your tax return by the April 15 deadline, you should file an extension. A six-month extension to file your return is automatic and will give you until Oct. 15 to finish and send your return. It is important to know that even if you have another six months to send your paperwork, the catch is that it does not give you an extension of time to pay any tax that is due.
Therefore, you have to make sure you calculate your tax liability as best as you can and pay 100 percent of what you estimate to be due with the extension. If you are self-employed and file quarterly estimates, you can also include your first-quarter estimate for the next year with the extension. When you finalize your return you would just elect to apply the overpayment to the next year. This provides a cushion in case your estimate is low.
What happens when your information comes in and you find out that you owe a little more in tax? As long as 90 percent of your total tax was paid by April 15, you still have a valid extension. The Internal Revenue Service will charge you interest on the tax that wasn’t paid by April 15th, but there will be no penalty. However, if you paid in less than 90 percent they may claim that the extension was not valid and assess penalties in addition to interest.
Now, what happens if you pay the tax with the extension and never get around to filing the actual return?
The IRS has strict rules regarding refunds of the overpaid tax. If you didn’t want to underpay your tax with the extension and you paid in a little extra, you must file the return within two years of making your payment, or you risk losing that overpayment.
People often mistakenly believe that once their tax is paid, filing a return does not take priority, but you can lose a refund if you wait too long. Sometimes circumstances are beyond your control — it is Oct. 14 and you are still waiting for information. The solution would be filing a return with an estimate of that income. The IRS allows you three years from the time of filing a return to amend it and you would still get any overpayment.
Working with your accountant also makes the process easier. You tax advisers will guide you in what estimated tax payments to make and also make you aware of any penalty situation. Also, you can always work out a payment plan with the IRS. It is important to file the returns and establish the tax liability. You don’t want to get into a cycle of non-filing and then being afraid to file because you haven’t paid your prior years taxes.
Paula Vuksic CPA of Wyckoff is a partner of Citrin Cooperman & Co. LLP, Springfield. Participants in Ask the CPA are members of the New Jersey Society of Certified Public Accountants. More information is available at NJSCPA’s public service Web site: MoneyMattersNJ.com. Northjersey.