What Your CPA Wants You to Know
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What Your CPA Wants You to Know
68. Filing an Extension For Your Tax Return? Here's What You Should Know!
Do you need more time to file your tax return this year? If so, don't forget to file an extension to reduce penalties!
In this episode, you'll learn the ins and outs of tax return extensions.
We dissect deadlines for all tax return filings and the penalties assessed if you do not file on time and/or do not file an extension.
We also talk penalties and interest—because if there's anything less exciting than watching paint dry, it's watching your hard-earned cash wash away to the IRS. But fear not! We've got your back, breaking down how the IRS penalizes those who file late and those who forget to file an extension.
And if you're staring down a tax bill that looks more like a phone number, don't panic! We cover the IRS payment plan and why it beats the ostrich strategy (aka burying your head in the sand) every time. So, sit back, relax, and let us guide you through all the details you need to know about filing an extension for your tax return!
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Well, and a lot of people ask whenever they file their tax return and it's after April 15th and they have some penalties and interest on there they always say what's the point of the extension then? And you might've heard me mention earlier, the failure to file penalty is the biggest penalty. The extension helps you avoid that. So even if you don't have the money to pay what you owe or what you think you might owe when you file your extension, you can still file that extension, so that all you'll get hit with is the failure to pay penalty, which is half of 1% plus whatever the interest rate is. Welcome to what your CPA Wants you To Know.
Speaker 2:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.
Speaker 1:I'm Carson Sands.
Speaker 2:And I'm Taryn Sands.
Speaker 1:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 2:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 1:We're here to share everything your CPA wants you to know in a fun and easy to understand way. Let's get started.
Speaker 2:Let's do it. Hello, hello and happy April.
Speaker 1:Happy April, happy spring to everybody.
Speaker 2:We're excited about April because tax season is almost over.
Speaker 1:Almost.
Speaker 2:It is definitely not a fun job and I feel like around this time of the year, I'm always like contemplating why we do this, but then, once the deadline passes then we get some time off I feel like I feel less like I want to quit.
Speaker 1:Well, I like it, but I am a nerd, so I also like other boring things like chess and reading about history. So just call me a nerd.
Speaker 2:Which is exactly why you're CPA, so no one is guessing that he loves doing tax returns. And speaking of tax returns, we are going to talk about filing an extension in this episode if you haven't filed your tax return yet.
Speaker 1:Extensions are when your hair isn't long enough and you get someone to make it longer with fake hair, right?
Speaker 2:No, but those are the dad jokes I have to live with every single day. So please feel sorry for me.
Speaker 1:You're welcome.
Speaker 2:We will talk about extensions, how you do one, what it means if you've never filed one before, what the penalties are, all of that. But first I did just want to bring up something. We are about a year into our podcast. It launched last February, so this year we're working on ways to monetize the podcast and there's a lot of different ways to do that. I wanted to give a little bit behind the scenes picture on this because a lot of people ask us.
Speaker 2:But we thought the best way to start this because we work with so many small business owners and that's kind of our specialty we wanted to offer sponsorships to small business owners. We had looked at working with maybe like QuickBooks or Intuit, to sponsor something and it feels right right now just to have some small sponsorships. So we're going to be offering some sponsorship ads. You'll see those coming up very quickly. We have our first one and those are going to be very inexpensive and you could pay for one episode or you could pay for an episode pack of like three. So if you are interested in advertising on our podcast, just send us a message on Instagram and we'll send you over the information on the sponsorships.
Speaker 1:These are great companies that everybody should really listen to the advertisements, because these are things that could really help you out a lot.
Speaker 2:Yeah, we're trying to make sure that it applies to almost everyone. It could be a service-based business or online-based business. We also have a lot of local listeners, so if you're local, we'd love to work with you as well. So there's so much more information in the packet we can send over as far as pricing and how many listeners and downloads we have and where they're located and all that. So definitely just reach out to us on Instagram if you're interested and we'll send that over, but without further ado. Let's talk about tax return extensions, not to be confused with hair extensions.
Speaker 1:Oh man.
Speaker 2:The first thing is if you have to file an extension, when should you file that extension by?
Speaker 1:If you have a partnership or an S-corp, then you need to file that extension by March 15th. So it's already too late for you on that one.
Speaker 2:Yes, and if you listen to the podcast you would have already known that due date. We try to drill that in, but you do need to file your extension every year before then or on that date in order to avoid that penalty. So what is the penalty if you don't file an extension?
Speaker 1:Well, for the partnerships in the S-Corps, you pay $220 per month that you're late, per partner or shareholder. So if this is just a single owner S-Corp, it's not as bad, especially if you're only a month late. The problem is, though, if you miss the extension, you need to file almost immediately, because you can't extend a month late and just pay one month of penalty. Now you have to file your tax return, or else each month that accrues on the 15th of each month, you're going to have another $220 per partner or per shareholder of that S-corp.
Speaker 2:Yikes, we're also going to talk about the individual extension, but I did want to bring up a good point is that, yes, they're going to allow you additional time to file, but not if you don't file your extension. So you have to file this crazy form in order to get this time, which is basically automatic. Everybody can do it, but if you don't file that form, you're going to pay a penalty.
Speaker 1:So the forms that are due April 15th are the individual 1040 tax returns, trust and estate returns, which are form 1041. And this is still somewhat new the C-Corps, which are form 1120. Not to be confused with the S-Corps and partnerships which were due March 15th. But it used to be the case that S-Corps and C-Corps were due March 15th and partnerships weren't due until April 15th, and it just didn't make sense because partnerships and S-Corps have K-1s that flow through to the individual. So it just makes more sense to have those be due earlier, which gives people time to get their K-1s and do the tax return, whereas the C-Corp it pays its own tax and so it does not affect the individual tax returns at all. So that one is okay to wait until April 15th. So that's the new rules.
Speaker 2:That's also important to know. If you have a partnership or an S-corp and you file an extension for that tax return, you're likely going to have to have all of the owners file an extension for their 1040s because they're not going to have all of the things they need to file their tax return because they don't have that K-1.
Speaker 1:So again, if you're an S-corp owner and you're the only owner, it's not a big deal because you only have to answer to yourself. But if you are the person in charge of the accounting and tax side, dealing with the CPA, you're that partner and there's a bunch of other partners. They might be a little irritated with you. If you sit around and wait too long. They'll be hounding you nonstop.
Speaker 2:When am I going to get my K1? Exactly, we do see that a lot. So just make sure that if you're running behind with a business return and you have other owners, that you let them know so they can go ahead and file the extension for their personal tax return if you're not going to have that K1 in time.
Speaker 1:Or just blame it on us. It's fine.
Speaker 2:Yeah, sure. One other thing to keep in mind, if that did happen, is that just because they get their K-1, let's say, april 7th or something that is right before the deadline but it's unlikely that their CPA will be able to still file that return if they just got the K-1 right before the deadline. So you just need to think about timing. And yes, it might be ready like right before, but you would still probably need to think about timing. And yes, it might be ready like right before, but you would still probably need to file an extension.
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Speaker 2:Now back to our show. So we talked about the deadlines to file these. So if you haven't filed yet your personal tax return, then you need to be looking at filing an extension before April 15th, which is coming up very quickly. So if you need to do that, how would one do that?
Speaker 1:Well, if you're a client of ours, we automatically do it if we don't hear from you. So you're safe. Now that's if we've done your tax return previously. If you've never worked with a CPA and you can't get anyone to answer the phone because it's, you know, april and they're busy, then the easiest thing to do is just go online and print form 4868. And that is the extension form. You just fill out that information it's about a quarter of a page worth of information and mail it to the IRS Online. It will tell you where to mail it and that's it.
Speaker 2:Yeah, really, it's just your name, address and social for all filers.
Speaker 1:That's right. It's very basic. If you're married, you need to put your spouse's information on there as well. But other than that, that's it. It's very easy. That's why we actually don't even charge for extensions, because it's just so easy to do it yourself.
Speaker 2:Well, carson was saying and I think that probably the vast majority of CPA firms will do this Everyone in our system that hasn't reached out to us and hasn't been filed, we would go ahead and do a mass extension of our entire client list. That just makes sure that everybody is covered. Maybe they didn't think about it or not, but you probably do want to reach out to your CPA and just say, hey, I haven't got my stuff together yet. Will you please file an extension for me, just to cover your butt and to make sure that they are doing what we do, because we can't really speak for everybody else.
Speaker 1:Right. Not everyone necessarily does that if you don't ask them to. With certain tax softwares that you use, there are also ways to file it online. I believe TurboTax and several of the other major providers of software have an option for doing that.
Speaker 2:So you can file it online. Just make sure that you file it by the deadline or on the deadline before midnight. If you mail it, just make sure that it's postmarked on April 15th and that it actually gets in the mail on or before the due date. So the next question that comes up is if you file an extension, when is your new date? How much longer do you have to file your tax return if you file an extension?
Speaker 1:So back to the S-Corps and partnerships that we mentioned earlier. Those have until September 15th, so they have a six-month extension from March, Also a six-month extension from April 15th. The C-Corps and the 1040 individual returns get six months, so they have until October 15th. The one weird kind of outlier is the estates and trusts, A trust 1041 form. It's due April 15th but when you extend it you only get until September 30th, and that's because the forms from that trust flow into the individual returns. So it just doesn't make sense to give that one the same deadline and then you have only a few minutes to turn around and put that in the personal tax return and get it filed on time.
Speaker 2:So if you have to file an extension, it gives you a few more months. But we often get people to ask us to file them a second extension and so tell everyone is this even possible? Can you extend again after the first extension?
Speaker 1:No, and that's something we hear most commonly from some of our older clients. This used to be a thing before. They had the automatic extension that just gave everybody six months. There was an extension where you got a lesser amount of months in that that you could file for. That was almost automatic. And then there was a second extension you could file if you had really good reason and you sent the IRS a letter and said the dog ate my homework or whatever, and they were okay with your excuse. Well then they would give you a second extension. But that's not a thing anymore. They just simplified it and said look, everyone gets six months extra. That gives you until September on your businesses and until October 15th on your personal tax return. That's plenty of time.
Speaker 2:So they're going to give you one extension period and that's it. There's nothing after that. But of course many people file after that extension date all the time. Yeah, but of course many people file after that extension date all the time. So tell us what happens if you still don't get filed by the extended due date?
Speaker 1:Well, that brings us into our penalties. So let's talk about all of the penalties.
Speaker 2:Oh, let's Sounds very exciting.
Speaker 1:Now we mentioned the penalties for the S-Corp and partnerships being laid earlier. The penalties and interests that are calculated on a C-Corp or an individual return are not flat amounts. They're based on the amount that you owe. So if you don't owe anything, then there's no penalties at all.
Speaker 2:Well, and let's just make it very clear, it's because if you file a partnership or an S-Corp return, you don't owe anything, you don't pay with that return, so there's nothing to base it off of, other than you didn't file it. So here's your fee.
Speaker 1:Exactly, but on the personal and the C-Corp. Then they only calculate it based on the amount that you owe, and so there's three different things that are extra charges if you owe money. One is interest, and that amount changes, but it is whatever the federal short-term rate is plus 3%. That tends to be the amount of interest that the IRS charges for late payments.
Speaker 2:And it accrues monthly.
Speaker 1:That is a daily accrual.
Speaker 2:Oh fun.
Speaker 1:So it's not 3% per day, it's just that you would take whatever the rate is Right now it's 7% or 8% and you would divide that by 365 days, and then you would multiply that by the number of days that you're late.
Speaker 2:So it really matters how many days you go past.
Speaker 1:For the interest. Now for the other penalties the failure to pay and the failure to file, those hit on the 15th of every month. So as soon as you're late, you have until the 15th of the next month, and on the 16th you're late again and so the penalty hits again. And those penalties are the failure to pay penalty. So this would mean that you filed an extension like you were supposed to, but you didn't pay any amount that you owe. Well, then you would be charged half of 1% per month up to 25%. So it's not a big penalty in that case. And then the big one failure to file. Failure to file penalty is 5% per month up to 25%. So that's a huge tack on on top of your taxes every year. That would be the penalty that you would have. If either you failed to file an extension or if you filed one, but then after October 15th you still hadn't filed. Then after that point you would start accruing this failure to file penalty.
Speaker 2:So you really don't want to file late if you owe the government money.
Speaker 1:That's a good point.
Speaker 2:And what if you are actually due a refund?
Speaker 1:Then you don't owe anything. Filing later you won't get any penalties, it just delays your refund. The sooner you file, the faster you'll get your money back.
Speaker 2:So basically, if they owe you money, they don't care at all when you file.
Speaker 1:No, it is very important that you file within three years, though, because you can file returns more than three years late, but you will not get your refund If you file up to three years after the original deadline. You can still claim that refund.
Speaker 2:Good to know. Now, one of the biggest things that I wanted to drive home on this podcast episode is that when you file an extension, it is not an extension to pay your taxes, it is only an extension to file your tax return. So can you explain in layman's terms what that actually means, because I find that a lot of people don't understand that.
Speaker 1:Right? Well, and a lot of people ask whenever they file their tax return and it's after April 15th and they have some penalties and interest on there, they always say what's the point of the extension then? And you might've heard me mention earlier the failure to file penalty is the biggest penalty. The extension helps you avoid that. So even if you don't have the money to pay what you owe or what you think you might owe when you file your extension, you can still file that extension, so that all you'll get hit with is the failure to pay penalty, which is half of 1% plus whatever the interest rate is. But if you get that additional failure to file penalty, that is way more. Now, that being said, if you think you might owe, or if you typically do owe and you're going to extend and you have the money, you should go ahead and pay in with your extension, because while the extension will avoid the failure to file penalty, you'll still be charged the failure to pay penalty if you owe after April 15th.
Speaker 2:Yes, they want your money by April 15th. They don't care if you haven't filed yet or if you don't know how much you owe, because if you haven't done your tax return you have no idea. They want you to have your money to them by that date. If not, you will get a penalty, even if you filed the extension. So it does make filing an extension for business owners kind of complicated, which kind of makes you not want to file the extension. You just want to go ahead and do your tax return so that you know you're not like overpaying or underpaying, and just get it done with.
Speaker 1:But if you've been listening to our advice and you've been setting money aside to pay in your taxes, then you say, okay, look, I always owe $5,000. I know I made at least this much money at least the same amount or more, as I did in previous years. Well, you could go ahead and pay at least 5,000. And then when you go to file at least if it turns out it was 6,000, well, you already paid five of it. So the penalties will only be calculated on the $1,000 difference that you still owe.
Speaker 2:And that's going to save you a lot of money. Exactly so a lot of people do ask us when they're filing their extension can I just pay what I paid in last year? And if that's typically what they owe and they've kind of been tracking it, that's what we recommend that they do, even though it's not always exactly accurate. The last common question that we want to cover on this episode is about payment plans. So a lot of times this happens maybe a business owner had a really great year or they weren't following advice and they really didn't set aside a certain percentage of their profits, and they get a big tax bill that they're just not prepared for. So if that happens, let's say you owe $20,000 and you don't have that money, what are your options with the IRS?
Speaker 1:That's a great question, and the reason it goes along with extensions is because a lot of people will say, okay, I don't have the money to pay, my return's ready to be filed, but just extend me because I don't have the money right now.
Speaker 1:That's not the best plan. See, whenever you owe the money, as we mentioned, you're going to get penalized either way, and if you file your tax return and you tell them how much you owe before April 15th, then what you can do is set up a payment plan. It doesn't reduce your interest at all that will still be charged the same but what it will do is reduce your failure to pay penalty. That's the one that was half of 1% per month. Well, they'll cut that in half. So now it's only a quarter of 1% per month plus the interest, and you can set up a payment plan. If you owe under $50,000, you're pretty much automatically approved for a 72-month payment plan, and the IRS interest of 7% to 8%, plus 3% in penalties is what it comes out to. That's not great. 11% is worse than a mortgage, but it's not as bad as credit card interest. So sometimes that's the best option for a taxpayer.
Speaker 2:Yes, you can just split it into those monthly payments and you can do that easily online. If you go to the IRS website, make sure you're going to irsgov to make sure you're on the right website and not some weird one. But you can set that up online and you just want to make sure that you set that up before the due date. All right, guys, that's all we have for you today. I hope this answers all of your extension questions. If it helped you in any way, please forward it to a friend so that we can continue to grow this podcast and continue sharing all of this free information to you guys.
Speaker 1:That's all we know about extensions, and that's all you need to know about extensions. So until next time, thank you for listening to.
Speaker 2:What your?
Speaker 1:CPA Wants you To Know Podcast. This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.