THE TAX ATTIC with Jerry Coon

Filing an extension?

Jerry Coon

This is the last tax article I will be writing before the end of the 2010 tax filing season. All individual returns are due to be postmarked or e-filed by midnight on the 18th of April. Returns can be e-filed right up until midnight from any computer, but it’s up to the local post office if they will accept tax returns put in their box and still postmark it on the 18th.

Why do we get to file returns until the 18th this year when the 15th is on a Friday and the 15th is the traditional due date for tax returns? Thanks can be sent to President Abraham Lincoln for this one. On January 1, 1863, Lincoln issued the Emancipation Proclamation freeing all slaves in states that had succeeded from the Union.

A constitutional note here: if you think the Presidential office doesn’t have some horsepower behind it, Congress did not pass the Emancipation Proclamation. President Lincoln issued the Emancipation Proclamation as an Executive Order under his authority as Commander in Chief of the Army and Navy. That power was granted to the President by Article II, Section 2 of the United States Constitution. No one at the time argued with Lincoln even though it was an aggressive order. He had the power to issue the Executive Order and, besides, it took Congress off the hook. They didn’t have to pass a law freeing the slaves. Lincoln took the heat. That heat ultimately cost him his life.

The Emancipation Proclamation, even though it was issued on January 1, is celebrated this year on April 15 in Washington, D.C. as a holiday. The national office of the Internal Revenue Service is located in Washington, D.C., so that office is closed because of the holiday. When the national office of the IRS is closed, all of the IRS offices are closed, including the various processing centers. Since the last day of tax season can’t be on a day the IRS is closed, which includes Saturday and Sunday, we have until Monday, April 18 to finish up and file all available tax returns.

About 80% of all returns are filed on or before April 18. Of course, that means about 20% of returns will be filed after April 18. The question is: Is there a penalty for filing a return after April 18? The answer to that question is: It depends. It depends upon if there is a balance due on the tax return. In the world of individual income tax, penalties are basically based on balance dues. That means if there is a refund, there usually aren’t penalties. However, for those taxpayers who have a balance due, the penalties can be severe and they come in two types.

The first type is the penalties for failure to file the tax return on time. By filing an extension by midnight on April 18, taxpayers will not be subject to this penalty as long as the return is subsequently filed by October 17. By filing an extension, taxpayers buy an additional six months to file the return without a failure-to-file penalty. However, if an extension is not filed, the penalty is 4.5% per month of the balance due on the return for each month the return is late, up to a maximum penalty of 22.5%. That is a huge penalty for failing to file an extension.

The second type of penalty is failing to pay the tax due on time. Remember that penalties are based on balances due. If there is no balance due, there are usually no penalties. When the return is filed, if there is a balance due, even if an extension was filed, it means the balance due wasn’t paid by April 18 and a penalty is due for failing to pay this tax by April 18. An extension is not an excuse to have not paid this tax by April 18. Extensions are a protection against failing to file the return timely. Extensions are not a protection against not paying the tax that was due originally on April 18. The failure to pay tax by April 18 is 0.5% per month. The total failure to pay tax by April 18 can also accumulate to up to a maximum of another 22.5%.

For example, taxpayers file an extension. They file their return by April 30, but it has a balance due. There will be no failure-to-file-a-tax-return penalty because the extension was filed, but they will be subject to a failure to pay their tax of 0.5% because they didn’t pay all of their tax by April 18.

A second example has the taxpayers filing an extension, but they don’t file their return until May 31. Again, they won’t be subject to the failure-to-file-the-return-on-time tax, because of the extension. However, if they have a balance due, now they are two months late in paying the balance due. April 18 to April 30 is one month; on May 1 they are now subject to a second month of penalty at 0.5%. Their total penalty for failing to pay tax by April 18 is now a total of 1%. For each succeeding month they are late, the IRS will accumulate another 0.5% in penalty.

The bottom line is this: Taxpayers should file an extension if they can’t file their return by April 18. That will eliminate the failure-to-file penalty. If there is a projected balance due, taxpayers should also pay that amount in by April 18. This will then eliminate the failure-to-pay-tax-by-April-18 penalty. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service in Rockford. Contact Jerry
at www.actiontaxservice.com.

 

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