Filing for an extension on your taxes doesn’t necessarily mean an audit. Here’s why

Posted on April 10, 2017 by KMA - News

Article by Gail MarkJarvis Chicago Tribune.

Taxes are due April 18.

What should you do if you can’t finish your tax return on time or if you don’t have the money to pay your taxes now?

There is a common belief that you should be among the masses filing by the April deadline so you don’t draw attention to yourself from the IRS and bring on an audit. (This year’s federal tax deadline, by the way, falls three days later than usual because of Easter Sunday and Emancipation Day, a legal holiday that will be observed in the District of Columbia on April 17.)

But there’s a difference of opinion among tax professionals about whether the belief about audits is valid. Taxpayers who can’t meet the deadline can file for an extension that will let them submit their tax return later. And they should file for an extension if they can’t get their tax return done right in time for the April filing date, said San Francisco tax attorney Robert Wood.

The most dangerous approach would be to file in a rush and make mistakes, he said. Mistakes can result in penalties. So if you can’t get your tax return right by April 18, he said, you can buy yourself six extra months by formally applying for an extension with Form 4868. The deadline for filing a Form 4868 is also April 18, but the extension gives you until Oct. 16 to get your return in order and filed.

Chicago tax attorney Robert McKenzie thinks in the current environment you may have less chance of getting audited if you file for a six-month extension than if you are on time with your return in April.

The reason: The IRS has suffered huge staff reductions and has had to cut back on audits. If the staff has taken on all the audits it can handle with the returns filed in April, the IRS may be less able to devote attention to those with extensions.

Despite the cutbacks, taxpayers always risk the chance that they’ll be caught if they make mistakes or cheat. McKenzie notes that the IRS has computers that spot red flags in any filing — whether in April or in an October extension.

Just make sure that if you file for an extension you realize that you are only giving yourself more time to finish your paperwork. That doesn’t delay your tax bill. You still need to pay the taxes you owe April 18. You will need to estimate what they will be and pay the IRS.

If you don’t pay on time there will be penalties — expensive ones. Each month that you don’t pay, you get hit with a 0.5 percent penalty charge on what you owe. In addition, you will be charged 4 percent interest per year. The IRS will also charge you 4.5 percent per month during the first 5 months you are late with filing your return. Skip payments long enough and the charge for a late payment can go as high as 25 percent. If the IRS sends you notices and you ignore them, your penalty charge can go to 1 percent a month.

This might tempt you to hide rather than filing a tax return or extension that might put the IRS on notice that you owe taxes. Don’t do it.

If you decide not to file a tax return on time, the penalty is harsh — 5 percent of what you owed at the start. And there’s more: There are late filing fees and late payment fees. The total can be as much as 47.5 percent.

On the other hand, if you can’t afford to pay your taxes and you tell the IRS, you can be put on an installment plan for up to six years.

If you owe under $50,000 you can simply apply online to the IRS. You will still owe interest, but you won’t face a penalty for ducking your responsibilities. If you can pay everything within 120 days, don’t file Form 9465, McKenzie said. Instead, call 800-829-1040 and plan to pay your taxes fully within 120 days. Then you will save yourself the fee required with an installation plan.

If you hide or skip payments and hope they will go away, the results can be painful, McKenzie notes. The IRS computers can find your accounts. Agents can take your pay automatically from paychecks, money in your accounts, or even your home. If you are single, and they go after your pay, you could be left with just $201 a week for living expenses, said McKenzie. The IRS also can tap your IRA.

If you think agents won’t touch your home, think again, said McKenzie. He’s seen a judge approve a claim by the IRS to take a 70-year-old couple out of their house.

Often there can be alternatives if you are in discussions with the IRS and show you are serious about paying. For example, rather than losing a home, people could take equity out of their home through a home equity loan or a reverse mortgage if over 65.

“The IRS is the toughest creditor you can find,” said McKenzie. That’s why if you are in danger of bankruptcy and can’t afford to pay the IRS, using credit cards is a better alternative than owing the IRS, he said. Debts on credit cards can be wiped out in a bankruptcy court, but bankruptcy doesn’t free you from the IRS, he said.

Please choose an option

KMA MPay

Secure Document Upload

Remote Assistance

Filing for an extension on your taxes doesn’t necessarily mean an audit. Here’s why

Leave a Reply Cancel reply

You might also like:

New Tax Laws That Impact Small Business Owners in 2017.

This Dividend Strategy May Save You On Next Year’s Taxes

Ready to get started? Let’s talk.