Hi everybody. I’m Bette Hochberger, CPA, CGMA. Today I’m going to talk about extensions. We have the saying, “An extension of time to file is not an extension of time to pay.” This makes perfect sense to accountants and probably sounds like a bunch of gibberish to everybody else.
During tax season, many people will say, “Oh, I’m not ready.” Maybe they’re not emotionally ready to handle dealing with their taxes. Maybe they don’t have everything they need yet to file their taxes, which happens if you’re a business owner or if you’re an investor, especially if you’re invested in another business that needs to produce tax documents for you like a K-1 or maybe you’re scared about this bill that you have coming up. You can’t pay it right now. So, people want to file an extension, which you can do alone. I have some videos explaining how to file some pretty regular extension forms, or they’ll ask us to do it if they’re our clients. But the thing you have to understand is when you file that extension, it’s literally extending the date by which you need to file the return.
If you file an extension, for a business, instead of the return being due on March 15th, it’s now due on September 15th. Instead of your personal return is due on April 15th, it’s due on October 15th. But that doesn’t mean the IRS says, “Oh, you owe us a bunch of money, that’s fine; just wait a few more months.” No. That’s what we mean by an extension of time to file is not an extension of time to pay because you’ll see the IRS is what we call a “pay-as-you-go” system. So really, you’re supposed to be withholding money from your paycheck. Most W-2 people probably get a refund or don’t owe anything when they file their taxes because the money’s being paid throughout the year, or you need to make quarterly estimated payments. That’s what the IRS means by “pay-as-you-go.”
If I make a million dollars in one quarter, I need to buy then that quarter’s estimated tax deadline due date to pay my taxes on that million dollars. Everything really needs to get paid in by April 15th for your individual taxes. If you file an extension and you’re not paying in by then, that’s where that second half of that phrase comes in; it’s not an extension of time to pay. The IRS wants their money. You feel like it’s your money, but it’s really their money. They want their money. We suggest that if you can owe and you can pay, pay something. If you are filing an extension because you don’t have the money to pay it, you can still file on time. You don’t have to file an extension just because you can’t pay the taxes right then and there, you can set up a payment plan with the IRS, and you’ll cut down on many of those penalties, interests, and things like that.
The penalty for failure to pay is a late payment penalty of 0.5% of the tax owed after the due date for each month or part of a month; the tax remains unpaid up to 25%. Wow, it could be a lot, right? So, if you ever see a situation where somebody owed taxes and didn’t pay them for a couple of years, you’ll notice that the penalties and interest related to those penalties are often much higher. Then, the taxes are high after a couple of years because it grows quickly. And the one thing you really, really don’t want to do, especially if you’re like, “Look, I can’t deal with my taxes right now, and I don’t have the money for it.” Don’t say, “Eh, I’ll deal with it later.” Because there’s another penalty called the “failure-to-file penalty,” it’s another penalty based on unpaid taxes, and that failure to file can be avoided by filing an extension.
If you can file on time and pay everything on time, fantastic, you’re on the happy path, as we call it. If you can’t pay immediately, it’s not as great, but the worst thing to do is not to file an extension or a tax return and not pay. It’s like you’re putting yourself in a bad position regarding dealing with the IRS.
So, now you understand why an extension of time to file is not an extension of time to pay. If you’ve got any issues with filing extensions or paying the IRS needing payment plans set up, or anything else like that, please feel free to contact my office. We work with clients on all sorts of issues dealing with the IRS. And we’ll see you next time.
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