Avoid IRS penalties by filing for a tax extension

Published 9:00 pm Thursday, April 1, 2004

With tax season in its final days, owners of small businesses who haven’t started working on their returns yet should seriously consider filing not their 1040s but their 4868s.

IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, gives taxpayers four extra months to finish pulling together the information they need to complete their returns.

Some business owners might worry that filing for an extension could make their returns more likely to be audited, but tax professionals call that fear groundless and advocate getting an extension rather than rushing and making mistakes that can cost you money.

"Why not get an extension?" said Barbara Weltman, a tax attorney in Millwood, N.Y., and author of "J.K. Lasser’s Small Business Taxes." "There’s no real downside."

Weltman noted that many small business owners file for extensions as a matter of course. Those with Simplified Employee Pension retirement plans, or SEPs, often get extensions to have more time to make their prior-year contributions; they use Form 4868 as a money management tool.

And many business owners who are in partnerships file for extensions because of delays in getting their Form K-1, which includes partnership income figures. Without that information, they cannot complete their 1040s.

Perhaps the most important reason for getting an extension is that without one, you could pay hefty penalties for filing your return late. The IRS charges 5 percent of the amount due for each month or part of a month that a return is late. It might waive a penalty if you have a good reason, but that’s up to the agency’s discretion.

Filing Form 4868 gives taxpayers until Aug. 16 to complete their returns. (Normally, the extension is until Aug. 15, but that date falls on a Sunday this year.) They can then request additional time of up to six months, but that is not automatically granted, unlike the 4868 extension.

Form 4868 is very short, calling only for your name, address, Social Security number and — this is the really important part — an estimate of your tax liability for 2003. You must make a good faith estimate of how much you owe the government. If you expect to pay no tax, you can enter zero. But the IRS warns in the instructions for Form 4868: "If we later find that the estimate was not reasonable, the extension will be null and void."

The form also asks how much you are paying. Even if you can’t pay, you’ll still get the extension, but you’ll be liable for late payment penalties of 0.5 percent per month or part of a month on any tax that isn’t paid by your return’s regular due date, which is April 15 for most.

Remember, Form 4868 gives you an extension of the time to file your return, not of the time to pay your taxes.

Weltman’s advice: "Pay as much as possible."

The IRS must receive your request for an extension by midnight April 15. You can file Form 4868 by phone or electronically using tax preparation software. In either case, be sure you jot down the confirmation number you’re given.

If you file a paper form, be sure it is sent before midnight on the 15th. It’s best to get a return receipt so you have proof that it was mailed on time.

You can pay your tax by having the money debited from your checking account, by credit card or by mailing in a check or money order.

A word of warning: If you’re shy about getting an extension and think that you’ll just take all your papers now to an accountant or tax attorney, chances are he or she will suggest Form 4868. At this point in the season, many tax professionals are tying up loose ends and filing for extensions, not taking on new clients who hope to meet the deadline.

Once you get your extension, don’t put off getting your return done. While it is possible to request more time with Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return, the IRS says it will grant the extra time only in cases of hardship.

And if you can’t get your tax return done by August, you probably should think about finding a better way to get this annual chore done more efficiently.

Small Business is a weekly column on the topic by the Associated Press.