In response to the COVID-19 outbreak, the Treasury Department and the Internal Revenue Service have provided special tax filing relief to individuals and businesses by extending the April 15th deadline to July 15th. While this relief has given taxpayers additional time to submit their tax returns, some may inevitably have forgotten about it. So when taxpayers are scrambling with their tax statements and documents, some wonder if they should file for an extension.
What does filing extension mean? It is a form (4868) that has to be submitted to IRS to request for a 6-month automatic extension. By successfully filing for an extension means no late-filing penalty will be assessed unless the return is not filed by October 15. 6 months will automatically be part of the extension; however, an extension to file is not an extension to pay. Meaning, when you file your extension, your tax balance still has to be paid by July 15.
There are pros and cons of filing a tax extension, the pros are if you're missing information (such as K1s or business deductions), filing extension would give you more time to gather and prepare for an accurate tax return to be submitted. Another benefit of filing an extension is to avoid the late filing penalty, which is 5% per month up to a maximum of 25% of your tax balance. Filing an extension doesn't cost anything, but the penalties of not filing your extension may be up to 25% of your tax balance.
While there are benefits to filing extension, it can backfire especially for taxpayers who procrastinate and wait till the last minute (October 15) to submit their tax return. Few disadvantages include the following:
Business owners who file late for 2019 taxes often lose sight of the importance of tax planning for the current year, i.e. 2020.
Business owners who file late for 2019 taxes end up incurring more interest.
In conclusion, for business owners who are not able to make adequate quarterly payments, we recommend them to file timely and request for an installment payment plan. This would allow business owners to not only reduce their penalties but enable them to plan out their cash flow and channel their focus on identifying the right tax strategies to optimize their tax position for the current year.
There are many legal methods and strategies to implement to reduce your tax bills but these strategies need to be considered and implemented throughout the year and not after the fact i.e. after December 31. If you need accounting or tax help, please call us today at (832) 295-3353 or please schedule your next appointment with us here > https://xqcpa-bookme.acuityscheduling.com/schedule.php. We are here for you!