April brings so many traditions of Spring that it's almost impossible to remember them all. Let's see, there's that wonderful weekend when you lose an hour of sleep and, oh yes, your tax return is due April 17. The first day of April is the one day of the year you better verify every thing you're told, and, oh, by the way, don't forget your tax return is due on April 17. This is also the month when the Easter Bunny gets to leave all sorts of stuff in your yard and the trash police can¬ít fine said bunny. Has anyone reminded you that your individual tax return is due on April 17?
Ok, three times in one paragraph is probably enough to get the message across that you should remember to file your income tax return by Monday, April 17, 2006. Even if you don't file your return, you absolutely must file Form 4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Of course, if you have all the information together, it's probably wise to go ahead and file your return, but sometimes there are practical reasons not to file. In those cases, filing a 4868 can save you significant heartache.
First, let's look at few reasons you may not be able to file your income tax return on time:
- Are you in a partnership or a beneficiary of a trust? Have you received the K-1s from those entities in order to include the income and loss on your return? It may well be these entities haven't filed their returns, so you certainly will not be able to file yours yet.
- Have you been able to put the finishing touches on the financial information from your business for the year? Perhaps you're having difficulty getting all the information to finalize your 2005 financial statements and, thus, don't have the information to prepare your return.
- The preceding reasons are acceptable in the eyes of the Internal Revenue Service and fall under the general heading of you don't have all the information you need to file a complete and accurate return. If you are in business, though, there is one reason that has nothing to do with lack of information and everything to do with lack of cash. Remember three little words - Retirement Plan Contributions. Except for Individual Retirement Accounts, just about every other qualified retirement vehicle allows you to deduct payments made before you file your return in 2006 against your 2005 income. This is true for Individual Retirement Accounts also, but those payments must be made on or before April 17 to be deductible for 2005. Profit-sharing, SIMPLE, SEP and other retirement vehicles will allow you until the extended due date to make the contribution. The extended due date this year is October 16, 2006.
- There are any number of other reasons you can't file on time, but you get the drift. Sometimes, you just have to wait to send your income tax return to Uncle Sam.
If you determine you're going to have difficulty sending the U.S. Government its annual love letter, you may have a few questions. Let's talk about some common questions.
One misperception is that filing an extension request will save you from paying on April 17. This is not true. Regardless of whether you send in your Form 1040 or not, you still have to make a reasonable guess at your tax liability and send the money in to the government. Let's say you don't have the money. What happens then? The good news is that filing for an extension will help you avoid being assessed a late filing penalty, which costs you 5% per month up to 25% of the tax due. The bad news is that you will still be subject to a late payment penalty, but that's only ½ of 1% per month. That's a significant difference, especially if the bill is big.
Another misperception is that filing an extension will automatically increase your chances for being audited. This is not true. If it were, there would be far more audits of tax returns each year than there really are. The IRS gets millions of extension requests each year and there has never been shown to be a correlation between who extends and who is audited.
As April 17 fast approaches, if you aren't able to file your income tax return, there is no reason to panic. Simply take stock of your situation and if it's simply a matter of not having all the information you need, estimate your income tax due as closely as possible and send in what you can along with the extension request. If it's a matter of needing cash to fund a retirement contribution, again, file your extension request and work toward getting the funds to make your contribution. In any event, if you can't file your return on time, don't forget to extend your return. The penalty savings alone can be worth the trouble of filing Form 4868. Of course, if you have any questions, please feel free to call. We are always ready and willing to help.
Have a fantastic April!