Filing your tax returns can be a very overwhelming process. The situation can add to the complexity when you file an extension for your tax returns.
The extension is only allowed in certain scenarios like you missed the deadline because of any contingent liability.
If you’re missing a deadline then you may have to follow a very hectic documentation procedure to cover up for the missing deadline. Furthermore, extensions in some cases may also make you pay extra taxes if you do NOT understand the processes.
For assistance, it is extremely important to consult with a CPA who is experienced in such a field.
Understand the Difference Between Late Payment & Late Filing
There is a requirement to pay interest and penalties on the unpaid amount of tax. A 5% interest is charged on an annual basis on unpaid tax amounts which are followed by a compounding effect on a daily basis. The IRS has such rules set for people who have bad credit scores.
If such people do not pay their taxes on time, the IRS will file a substitute for them. Moreover, such people will lose the benefit of tax deductions and employee benefit schemes.
There is an evident difference between paying late and late filing. It is also important to note that you may be subject to late filing or late payment penalties, and in some cases, you may be subject to both (late filing, late payment) penalties.
The main things to keep in mind when paying late or filing late are mentioned below:
Late Filing:
If you have failed to file your tax return on time and you haven’t even applied for the extension, you may be charged the percentage of the taxes you have not paid every month till the quarter of your total amount.
If the time period exceeds 60 days, you might have to pay double the amount for your taxes.
Late Payment:
If you miss the deadline, you will have to pay the penalty fee for late payment which is 0.5% of the unpaid tax amount every month to 25% of the unpaid tax amount.
These are the rules set by the IRS itself, so there is NO chance that you can escape from them.
What to Do After Filing an Income Tax Extension?
After filing for an income tax extension, you may go through extra processes to file your taxes. These processes may include knowing all the extra late payment details and filing your taxes with accurate data.
Following are some steps to keep in mind after you file for a tax return:
Step 1: Check Your Extension Status with Federal Tax Department
After filing for a tax extension, wait till you receive the confirmation receipt of the extension is accepted. You will get the confirmation receipt within 48 hours of filing the extension request.
- If you applied for an extension through the mail, then you can track the status of your extension by contacting the IRS.
- The IRS website will NOT be of any assistance to track extensions, you will have to call the customer service of the IRS (800-829-1040) to check in with the status of your request for extension and approval.
Step 2: Check Your Extension Status with State Department
As different states have different tax extension policies, make sure you comply with these rules as well.
If your state has a requirement of filing a separate federal tax extension with an extension application then you should check in with your state tax authorities.
However, for the confirmation of the papers of extension, you will still have to call the customer service of the IRS (800-829-1040).
Step 3: Consult a CPA if Extension Request Gets Rejected
Yes, extensions can easily get rejected even if you follow all the correct filing procedures.
The main reason for the tax extension being rejected is grammatical errors, wrong information, or misleading numbers.
You will be notified about the rejection through an email which is sent by the IRS.
Sometimes the IRS informs the individual to take prompt action to fix small errors in the extension form. It usually gives 5 days to make any amendments that are required by the IRS and file again.
However, getting rejection by the IRS depends upon your individual case as well. You should take a quick consultation with an experienced CPA to help you get the extension and fix the error.
Step 4: Calculate Your Due Tax
Once you have received the confirmation notice for your extension, the next step will be to calculate your taxes.
Step 1: Calculate your Late Payment Taxes
When you file for an extension, a 0.5% penalty is charged on the unpaid amount per month, and the maximum interest permissible is 25% of the unpaid amount.
To calculate the amount that is yet to be paid, follow the below-mentioned procedure:
If your unpaid tax amount is $3000
- Penalty per month = $3,000 x 0.5% = $15
- Total possible late payment penalty = $3,000 x 25% = $750
Step 2: In Case You are Out-of-Country
There is a different tax rule for people who are out of the country. They are given the benefit of an extension of 2 months.
They are NOT charged with any penalty during this time period. However, compounding interest will be charged as per normal procedures. The interest rate charged in this case is:
- A 0.81% plus 3%.
- With each passing day, the interest rate will increase by 0.0104.
Step 3: Calculate Your Final Taxes With Penalties
To calculate the amount that is yet to be paid, follow the below-mentioned procedure:
For example, if you have to pay $3,000 in taxes and you miss the deadline then, you’ll pay:
- 0.81% + 3% = 3.81% annual interest
- 3.81% annual interest divided by 365 days = .01%
- Penalty per day: $3,000 x 0.01% = $0.30
It is important to calculate your due amount prior to the payment so that you have an idea of what you’re getting into.
Step 5: Organize Your Necessary Documents
You have to be meticulous while gathering all the necessary data and documents needed to file for a tax return. After filing for an extension, get all your papers in one place.
This will make it easy for you to track your tax returns at a later date. During the 6-month extension period, you must keep everything ready and organized.
The most prominent documents that you must gather are mentioned below:
- Previous year’s tax return
- Income statements
- Payroll reports
- 1099 income earnings
- Receipts of business-related purchases
- Brokerage statements
- Virtual currency transactions
It is also important to note that you may need additional documents as well depending on your individual case.
Step 6: Consult with an Experienced CPA to Avoid Late Filing Penalty
In recent years, studies show that around 50% of the tax is being filed by private tax professionals now.
Filing your tax return is a hectic process. To be on the safe side you can always take help from an experienced CPA, they will help you get passed through the filing process in the right way.
Experienced CPAs are extremely good at their jobs. They even give you the benefit of avoiding hefty tax penalties through their expertise in the field.
