Tax Extensions: What Your Clients Need to Know

It’s that time of year again; we are all trying to get our clients’ personal and business tax returns filed by the initial due date because we have clients who say, “I’ve never filed an extension in my life, and I’m not going to this year either.” Then we have other clients who don’t have everything ready and are perfectly happy filing an extension.

The reasons for filing an extension are different for every taxpayer. Some don’t have all of their data ready, while others don’t have the money to pay their taxes, yet. Whatever the reason, you clients need to know that the extension doesn’t delay when the tax is due; it only delays the filing of the tax return.

Original Due Dates. Business and personal tax returns have different due dates; the following dates indicate when the tax return must be postmarked:

• Form 1120 and 1120s (corporations) are due 75 days after the end of the year (March 15 unless the 75th day falls on a weekend or holiday, then it will be the next business day).
• Form 1065 (partnerships) is due 105 days after the end of the year (April 15 unless the 105th day falls on a weekend or holiday, then it will be the next business day).
• Form 1040 (individual) is due 105 days after the end of the year (April 15 unless the 105th day falls on a weekend or holiday, then it will be the next business day). April 18 for 2015 tax returns.

Extension Due Dates. When an extension is filed, the IRS will grant a 180-day extension from the original due date. If the 180th day falls on a weekend or holiday, then the extended tax return must be filed by the next business day. The filing deadline is when the tax return must be e-Filed or postmarked. The extension dates include the following:

• Form 1120 and 1120s (corporations) extension due date is Sept. 15.
• Form 1065 (partnerships) extension due date is Sept. 15.
• Form 1040 (individual) extension due date is Oct. 15.

Tax Due Dates. There are two ways for clients to pay their taxes throughout the year:

• W2 withholdings on each paycheck – paid via company payroll process.
• Quarterly tax payments – paid directly by the corporation or individual.

Corporate estimated tax payment due dates for 2016 are April 18, June 15, Sept. 15 and Dec. 15; If there is a remaining balance at March 15, the balance must be paid at this time to avoid penalties and interest.

Individual estimated tax payment due dates for 2016 are April 18, June 15, Sept. 15 and Jan. 17. If there is a remaining balance at April 15, the balance must be paid at this time to avoid penalties and interest.

Penalties and Interest. Since the IRS wants its money throughout the year, it charges penalties and interest when tax is paid late. The late payment penalty is .5 percent of the tax owed for each month or part of the month that the tax remains unpaid.

Failure to file penalty is the combined penalty of 5 percent (4.5 percent late filing and .5 percent late payment) for each month or part of a month that your return was late up to 25 percent. Late filing penalty applies to the net amount due. Interest rate is the federal short term rate plus 3 percent. The federal short term rate is determined every three months.

Relief From Penalties and Interest. Your client can ask for a first-time waiver if he or she meets the following conditions:

• The client didn’t have to file a return or have any penalties for the three tax years prior to the tax year in which he/she received a penalty; or
• The client filed all currently required returns or filed an extension of time to file and if the taxpayer has paid, or arranged to pay, any tax due.

If a 1065 is filed late, the partnership can qualify for penalty relief under Rev. Proc. 84-35 (10 or fewer partners) and each partner has filed a personal tax return (including extension) by due date.

As you can see, filing an extension is not a simple as checking the box for your clients. Let them know about the other issues surrounding the extension so there are no surprises for them when they actually pay the tax.

Editor’s note: A prior version of this article included an incorrect date above.