Well, April 15 is here. Accordingly one of two things are about to happen -- either you are filing your federal and state income tax returns or you may be preparing to file an extension for filing your taxes. If you are you one of the many people getting ready to file an extension for your tax return, there are several considerations that you should take into account. Check out the common situations below that lead to folks filing extensions, and what you should know:
- You don't have all your tax information. This is probably the best reason to file an extension. The IRS realizes that life happens and some taxpayers may have lost paperwork, been out of the country or incapacitated during the tax season and don't have all the necessary paperwork together, or they are waiting on tax statements from a business or investments that use a non-traditional fiscal year, such as May 1 through April 30. If this is the case, start your tax return using all the information you have and estimate your income, or loss, from the missing statements to get a clear idea of your tax bill this year. Don't forget to pay at least 90 percent of the expected balance due with your extension to avoid penalties.
- You don't have time. The amount of work necessary to file an extension is equivalent to the amount of work needed to file your actual tax return. You must estimate what your actual taxes will be when you file the extension. If you have all your paperwork, you should go ahead and file your return since you are doing the return work anyway.
- You want to make an IRA contribution for 2013. Making a traditional IRA contribution is one of the best bargains in taxes: you can lower your taxable income and taxes, you may get a credit on your contribution, and the earnings are tax-deferred; but, you are almost out of time. You can make contributions to your IRA for the prior calendar year until April 15, but after April 15 all contributions are for the current calendar year. An extension does not extend the time to make contributions for the prior tax year.
- You want to reduce your chances of being audited. This is a total myth that somehow continues to exist. The IRS doesn't choose people for an audit based on when they file. Audits usually fall in three categories:
1. Computer matching of all W-2s and 1099s against the income reported on your tax return,
2. An error on your tax return,
3. Random computer pick of your tax return.
So filing late, early, or even on the last day will not affect your chances of an audit. Instead make sure you have all your income reported on the tax return, you have good support for all of your deductions and credits, and the names and Social Security numbers are correct.
- You owe and don't have the money to pay right now. This is one of the worst reasons to file an extension. As I have said before, the extension is only for filing the forms and suspending the penalty for late filing. If you owe taxes and don't pay them on April 15, or at least 90 percent of them with your extension, you will be assessed the late payment penalty. The late payment penalty is ½ to 1 percent of the outstanding taxes per month up to a total 25 percent. The IRS also charges interest on top of the penalty and taxes owed. IRS compounds interest daily which increases the total balance due rapidly so keep your interest payment down by paying as much as you can with your extension.
We've covered the best reasons to extend, the worst and the reasons in between. No matter what you decide to do, remember to pay your taxes on April 15. The cost of ignoring a balance due to the IRS is high and just not worth it. There is still plenty of time to file your tax return and plenty of help if you want to get it. If you are reading this AFTER April 15th and you did not get to your extension in time, file and pay as soon as you can and watch for my future piece on what to do if you get an IRS notice.