What to Do if You Filed for an Income Tax Extension
by November 1, 2020
If you filed for a tax extension earlier this year, you’re due to file your 2015 tax return on October 17th.
Tax extensions are a great way to give yourself more time to work with your accountant and file an effective tax return. But they’re not so great if you still struggle to get organized and file on or before the extension deadline.
To help you file on time and avoid unnecessary stress, let’s go through the steps you’ll need to take to file your tax return by this year’s extension deadline.
Work With Your CPA, ASAP
This should go without saying, but it bears repeating: don’t miss the extension deadline, or you’ll be penalized by the IRS.
If you haven’t done so already, contact your CPA and work together to finalize and file your tax return. (Remember: CPAs are notoriously busy around tax time, so pick up the phone and book some time with them—stat!)
If you’re not working with a CPA to file your taxes, block out time in your calendar to get your financial information in order.
The quickest way to file a return is digitally, via the IRS website.
Once filed, you’ll need to wait for the IRS to process your return to determine if you overpaid or underpaid your taxes owed for the year.
If You Overestimated Your Tax Payment
When you filed for a tax extension in April, you estimated what you would owe in taxes for the year and paid them to the IRS.
If you overestimated (and therefore overpaid) your taxes owed for the financial year, the government now owes you money. This will be repaid to you by way of a tax refund.
According to the IRS, if you filed your return online, there is a nine in ten chance you will receive your refund within three weeks. If the IRS pays you your refund late—45 days or more after you filed—they are obligated to pay interest on the money.
If you filed via regular post, you should get your tax refund in six to eight weeks.
You can check the status of your return, and find out approximately how long you have to wait before receiving a refund, by logging into your IRS account and using the “Where’s My Refund?” tool.
Depending on whether you factored in the possibility of a refund, and how badly you need the extra money, consider treating it as a windfall—something to put aside, and help pay next year’s taxes.
If You Underestimated Your Tax Payment
If you underestimated your taxes owed for the year, unfortunately, you will owe the IRS money in the form of penalties as well as the outstanding amount of taxes you owe.
The penalty for underpaid taxes is .5% of the amount owing, compounded monthly, starting the day after your taxes are filed by the IRS. The rate increases by .5% for every month that goes by that you don’t pay, until you owe a maximum of 25%.
Example:
If you got a tax extension, but underpaid by $1000, you will start accumulating the monthly penalty interest of 0.5% on October 15th.
By November 15, with a rate of .5%, you will owe $1005.
By December, with a rate of 1%, you will owe $1015.05.
By January, with a rate of 1.5%, that number will be $1030.27.
Should you continue to fail to pay the difference, your penalty will max out in late July 2017 at $1250.
Note that if you underpaid less than $1000 in taxes, you won’t need to pay the penalty.
If you find it difficult to pay down the taxes you owe, you have the option of applying to start a payment plan with the IRS.
To ensure you don’t underpay your estimated taxes owed in the future, you need to pay the IRS at least 90% of what you owe this year, or 100% of what you paid last year—whichever amount is greater. If you don’t do this, you’re underpaying, and you’ll be charged a penalty.
If You Miss the Extended Filing Deadline
If you fail to file your extended taxes on time (by October 15), you’ll be on the hook for the same penalties you would pay if you missed the original deadline.
Essentially, this means that you will owe 5% of the additional taxes owed for the period between the filing deadline (October 17) and the day you actually file, compounded monthly, to a maximum of 25%.
Example:
If you owe $1000 in taxes but don’t file by October 17, then by November 17, you will owe $1050.
By December 17, you will owe $1100.50, and by January 17, $1155.53.
Near the end of February, the amount owing will be $1250, at which point you have reached the 25% limit set by the IRS.
How to Avoid “Tax Deadline Panic”
Filing for a tax extension is a smart move. You can use the extra time to file to work with your CPA, identify the maximum deductions available to your business, and file an effective tax return.
But if you still struggle to get organized and meet the extended tax filing deadline, the deadline itself may not be the problem—it might be how you approach tax filing altogether.
These measures can help you improve your approach to tax filing, and avoid “deadline panic” altogether.
Set Calendar Reminders
At the start of each financial year, set tax deadline reminders in your Calendar.
For instance, set a reminder two weeks before every quarterly estimated taxpayment deadline.
The simple act of mapping out your financial must-do’s for the year ahead helps you stay on top of filing deadlines, especially when things get busy and your attention is elsewhere.
Automate Financial Tasks
Online apps and services can automate and handle the grunt work of time-consuming financial tasks.
Gusto can help you manage employee payroll and benefits, while storing records and necessary tax forms online, and Freshbooks lets you standardize and track your invoices.
Outsource Your Bookkeeping
Bookkeeping is one of those unavoidable tasks you’ll deal with in small business. And it can be incredibly time consuming. When your business grows to the point that it doesn’t make sense for you to worry about the books, hand the task over to the pros. Hire a bookkeeper, or outsource your bookkeeping to Bench, the online bookkeeping service that pairs you with a team of professional bookkeepers who do your bookkeeping for you. (Full disclosure: that’s us!)
Getting a tax extension should be a strategic choice, not an act of desperation. If you take the right steps to prepare your filing deadline—whether it’s in April or in October—you’ll master the art of tax filing, and it won’t continue being a source of stress.
TaxJar users who sign up with Bench get 20% off their first six months of bookkeeping.
AUTHOR BIO
Bryce Warnes writes for Bench, the online bookkeeping service that pairs you with a team of professional bookkeepers who use simple software to do your bookkeeping for you.Please note: This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time. For specific sales tax advice regarding your business, contact a tax advisor.
