No, you’re not going to a Federal prison. They’re overcrowded as is. However, missing this deadline can cost you money, sometimes a lot of money. Let’s see how it works.
Note: in 2017, the deadline is Tuesday, April 18, thanks to the Emancipation Day celebrated on April 17 in Washington DC.
There are 7 different IRS deadlines on April 15, not one!
- On April 15, you’re supposed to pay off the balance of your 2016 personal income taxes if you have not paid enough from your paychecks or from voluntary “estimated payments.” If you expect a refund – you need not worry about this first of the six deadlines. However, if you do owe the IRS and do not pay it in full by April 15, you will start accumulating penalties and interest.
- On April 15, you’re supposed to file your 2016 personal tax return – Form 1040. This means sending paperwork to the IRS, whether you owe them or they owe you. Missing this deadline is technically breaking the law and can have consequences, depending on your line of work, your immigration status, and your standing with the IRS. For most people, however, the real problem with missing this second of the seven deadlines is that penalties for not paying the balance due increases literally tenfold. Luckily, if you do not owe taxes for 2016 – the penalties is not your problem.
- On April 15, you’re supposed to file your 2016 C-corporation tax return – Form 1120. Prior to 2017, C-corporation taxes were due on March 15, and Partnership taxes were due on April 15. These deadlines got switched in 2017: partnership are now due March 15, and C-corporations on April 15.
- After April 15, you lose your rights to any potential refund from your 2013 tax return. Even though you (hopefully) filed your 2013 tax return long ago, you still have a small window of time to correct any errors on that tax return or add more deductions and credits. After April 15, it will be too late. If you have not filed your 2013 tax return yet (and I know quite a few people who have not) – then it is your last chance to claim a refund from 2013. The only possible relief is if you had filed a timely extension for 2013 – then you can procrastinate a little longer. Otherwise, April 15 is the last day to claim your 2012 money.
- On April 15, you’re supposed to send the IRS your first estimated payment towards your future 2017 taxes. People who most likely need to pay attention are Realtors, consultants, contractors, rehabbers, flippers, builders and wholesalers – anybody who does not have taxes taken out of their paychecks. Of course, this is assuming that your business will show profit in 2017. Missing this payment deadline will trigger an IRS penalty, albeit a relatively moderate one.
- April 15 is the last day to make 2016 contributions to your retirement accounts: IRAs, Roth IRAs, and most others. Not only these contributions increase your retirement accounts, but they may reduce the amount of taxes due for 2016. After April 15, the only type of retirement accounts still available for 2016 contributions is SEP-IRA for self-employed people. Warning: many financial institutions have cutoff times for accepting 2016 contributions on April 15, and some of them even stop it a day or two in advance. Check with yours!
- On April 15, you’re supposed to file 2016 state tax returns, pay 2016 state income taxes, request any remaining state refunds from 2013, and possibly make a 2017 state tax estimated payment. This only applies to those states that impose state income tax. Luckily, Texas is not one of them. However, regardless of where you live now, you may be subject to 2016 income tax from the states where you used to live, where you worked, where you owned real properties or businesses, or from where you received some other income. Frustratingly, state taxation does not follow the IRS rules and varies greatly from state to state. Make sure to research the rules of each state where you had residence, work, business or investment ties.
Don’t I have an extension option?
Yes and no. I just outlined 7 different deadlines, and each of them has its own rules when it comes to extensions.
- Paying 2016 taxes. Alert: you cannot get this deadline extended! From April 16, you start accruing penalties and interest, extension or not. However, without an extension, your penalties will be 10 times (!) higher, so by all means do file an extension.
- Filing 2016 personal tax return. This deadline is easily extended for 6 months, until October 15, just for asking. The IRS calls it “automatic.” Well, it is automatically granted, but you do have to ask. Asking means sending the IRS a very simple Form 4868. You can do it online, however not on the IRS website. Even though most providers charge you a fee for online filing of extension, it is worth it, because the IRS does lose a lot of extension forms filed by mail. I once even had the IRS misplace extensions that I hand-delivered to their office. Do it online.
- Filing 2016 C-corporation tax return. You can get a no-questions-asked 5-month extension, until September 15. You need to file Form 7004, and I also highly recommend finding a vendor to do it online. Caution: filing your personal tax extension on Form 4868 does not grant extensions to your corporations! They must be separately requested.
- Requesting 2013 tax refunds. The extension had to be filed in 2014. If it was filed and accepted by the IRS, you already have time extended until October 15. Otherwise, no more extensions.
- 2017 estimated tax payments. No extensions available. The penalty will start dripping in on April 16.
- 2016 IRA contributions. No extensions available. Only SEP-IRA accounts can be funded after April 15.
- Filing 2016 state tax returns, paying 2016 state taxes, and all other state tax issues. Each state has its own rules. Some states honor Federal (IRS) extensions, others require specific filing of a state extension. Caution: if you need to file a state tax return, do not assume that the state will follow the IRS rules or accept the IRS extension – check with the state.
How much are the penalties?
Suppose you owe the IRS $1,000 for 2016; you file an extension on April 15 but do not pay. Here is how you balance will grow from penalties and interest:
by May 15 – $1,008
by June 15 – $1,017
by October 15 – $1,050
The numbers will be much more troublesome if you fail to file an extension:
by May 15 – $1,053
by June 15 – $1,108
by October 15 – $1,279
The IRS can never forgive or reduce interest, however first-time penalties can be removed. If you never had late penalties from the IRS, you can request that they waive them, and usually they will. After the first time, forgiveness of penalties is unlikely.
Does filing an extension trigger an IRS audit?
I have heard that some gurus and online bloggers made such claim. I disagree, and this is why. In my business, I help a lot of people who are audited by the IRS. The IRS audits do not start until about 1.5 years after the filing deadline. In other words, if your 2016 tax return is audited by the IRS, you will hear from them somewhere in late 2018, not now. This is way past the October extension deadline.
If you believe that filing an extension causes an audit, you’re suggesting that the IRS flags your tax return now, in 2017, and then waits more than a full year to send you a letter. This gives our government too much credit for being organized (or evil if you prefer).
From my experience, extensions do not affect audits. Tax returns are audited based on what they contain, not on when they are filed.
Should I prepare a draft tax return using rough estimates?
Yes, because it may give you an idea of whether you’re getting a refund or end up owing money to the IRS. And if owing, then how much.
However, do not file this draft version with the IRS! Many people commit this dangerous mistake. They create a tax return based on ballpark guesses, such as – I made approximately $80k in commissions and had approximately $50k in business expenses, so my income was about $30k. They send this quick-n-dirty tax return to the IRS, and they plan to fix (“amend”) it later, with the correct numbers.
It is a very bad idea, for two reasons. First, there is nothing more permanent than temporary. Once you send the draft version to the IRS, this very unpleasant task is out of your mind, and I bet you will never force yourself to revisit this already “completed” project. In a few months, the IRS computer, noticing that your tax return contains those suspiciously round numbers, will flag you for an audit.
Secondly, if you do summon the willpower to prepare an accurate tax return later and submit the amended version to the IRS, you again will run a high risk of an audit, especially if your revised version substantially reduces your taxes. And, should it increase your taxes instead of reducing them, you will be hard tempted to sweep the revised version under the rug.
Either way, this is a lose/lose situation. The right way is to prepare a ballpark estimate but file an extension. Then file only one, accurate, tax return whenever it is ready.
Better yet – set up a professional bookkeeping system and stop those tax time headaches altogether! Ask us, we will be happy to help.