More than 5 million businesses and 10 million individuals file for an extension on their taxes in April, according to the IRS. If you’re one of them, the deadline to file is coming this fall.
The purpose of an extension is to allow the taxpayer additional time to gather their information so that they can file a complete and accurate tax return without incurring a late filing penalty.
If you have filed an extension with the IRS for your personal or business taxes, you have only extended the filing due date of your tax return. For example, a 2015 Individual Tax Return Form 1040 that was due on April 18th would be extended for six months until October 15, 2016. The extension filing deadline may be earlier for some businesses and non-profits, depending on structure and fiscal year calendar.
An extension only extends the filing due date of your return, NOT the date you have to pay any underpayment of taxes.
Although there is no requirement that you make a payment on taxes due when you file an extension, you will owe interest and penalties on any underpayment of taxes if you pay nothing when your return is extended. This can really add up if your tax liability is considerable amount.
For the taxpayers that are unable to pay the full amount of the taxes when their returns are extended, there are payment options that the IRS offers such as an installment agreement.
Business Tax Filing Deadlines
C and S Corporation businesses that file Forms 1120 and 1120S and are calendar-year corporations are required to file their tax returns by March 15 every year. If they have extended their returns the new filing deadline becomes September 15.
If your C or S Corporation business has adopted a fiscal-year filing instead of a calendar year, the tax return is due two months and 15 days after the close of your corporation’s specific tax year. A fiscal year covers any 12-month period that ends on the last day of ANY month other than December. So, for example, if a corporation’s fiscal year ends on May 31, the tax return is due on August 15, but can be extended for six months until February 15. For tax year 2016, for returns due in 2017, the filing deadline for a calendar year C corporation is April 15, and it can be extended until September 15.
Limited Liability Companies (LLCs) that have directed the IRS to tax them as a C or S Corporation or a partnership must file Forms 1120, 1120S or Form 1065. For tax year 2016 with returns due in 2017, the original filing deadline for an S corporation or Partnership is March 15. If additional time is needed, the return can be extended for six months making the new due date for filing September 15. For tax year 2016, for returns due in 2017, the filing deadline for a calendar year C corporation is April 15, and it can be extended until September 15.
Non-Profit Tax Returns
A non-profit tax return, Forms 990 of 990EZ, is due by May 15 if a calendar year is used. These returns can be extended for three months and would then be due by August 15. Fiscal-year filers of Forms 990 and 990EZ may also be extended for a three-month period and again are dependent upon the entity’s specific tax year.
Penalties and Interest
The IRS has the power to levy a variety of penalties and fees for late filing and late payment.
The failure-to-file penalty is generally higher than the failure-to-pay penalty. However, the penalties can be avoided with on-time filing and payment in full. If you cannot pay in full, the IRS will work with you on a payment plan, and you can reduce interest and penalties by paying as much as you can when taxes are due.
If you can show “reasonable cause” for your late filing or late payment, according to the IRS, you might not have to pay the penalty, but what constitutes a reasonable cause is a matter of opinion in many cases.
According to the IRS website, the penalty for filing late is 5 percent of the unpaid taxes for each month or part of a month that your return is late. The penalty is applied the day after your due date to file taxes, but it will not exceed 25 percent of your unpaid taxes.
The penalty for failing to pay is 0.5 percent of your unpaid taxes, and it applies t
o each month or part of a month that your payment is late. Like the penalty for filing late, this penalty is applied the day after your due date.
If both penalties apply for failure to file and pay, the maximum penalty you’ll face is 5 percent each month of your unpaid taxes due. If you are more than 60 days late to file after your original or extended due date, the minimum penalty you will pay $135 or 100 percent of your unpaid taxes (whichever is less).
Avoiding penalties by filing and paying on time is always your best bet, but a good CPA firm can help you navigate this process if you need help. Call Wendroff & Associates for answers to any questions you have on tax extensions and related matters.