Extensions and amended tax returns
Your Tax Preparer
March 19, 2022
Whether you file a tax return by the April due date, or obtain an extension to file, filing an annual tax return is mandatory if your income is above a certain level, which will vary depending upon your filing status. Reasons to file an extension include waiting for an important document such as a late 1099 or K-1 form showing income which needs to be reported, you may be overseas and unable to file by the April deadline, or you may just be a habitual procrastinator. Whatever the reason, filing an extension will grant you another six months for individuals and corporations (five month extension for partnerships, LLCs, estates and trusts) to file the return.
Filing an extension, however, will not allow you to delay payment on any tax you may owe. The extension is to obtain additional time to file a true and accurate tax return. The tax is still due by the original filing due date, therefore you should have a reasonable estimate of the tax liability you will owe. If you anticipate your taxes withheld or paid by estimated tax payments will not cover the tax due, you should file a federal Form 4868 and/or a California Form 3519 and pay the additional tax you anticipate will be due.
Failure-to-pay penalties are 0.5% of the unpaid balance per month up to a maximum penalty of 25%. You may say, "Who cares if I file my tax return on time?" If your tax is overpaid, there is no penalty for filing late (the government thanks you for giving them a longer interest free loan). If however you owe money and file late (do not get an extension) the penalty is 5% of the unpaid balance per month up to a maximum penalty of 25% of the underpaid tax. Hence the recommendation to make a reasonable estimate of your tax liability before the April 18 deadline. California automatically allows a six-month extension to file all tax returns (you don't need to file an extension form with the state) unless you owe money, and then you should file Form 3519 with payment of the additional tax due by the April 18 filing deadline to avoid the late payment penalty.
If you are part of a partnership, limited liability company or limited liability partnership, or an S-Corporation, the federal late filing penalties become horrendous. The penalty for late filing of a partnership, LLP, LLC or S-Corporation tax return is $195 per partner, per month, up to 12 months (even if no tax is owed). For example, if a partnership did not obtain an extension, had three partners, and filed the return three months late, the late filing penalty would be $1,755. This, from the "new, friendlier Internal Revenue Service."
Should you decide to file an extension, make certain you pay any taxes owing the Federal and/or State taxing agency by April 18, 2022 or be prepared to pay penalties and interest on taxes owed. There are three ways you or your tax professional can request an automatic extension of time to file a U.S. individual income tax return: (1) you can electronically file Form 4868 (Application For Automatic Extension of Time To File U.S. Individual Tax Return); (2) you can pay all or part of your estimate of income tax due using a credit or debit card; or (3) you can file a paper Form 4868 by mail.
If you have already filed your tax return, and discovered a mistake on the return or an important document was left off, you may need to file an amended individual federal return (Form 1040X) and/or an amended California return (Form 540X). These forms and instructions are available on the websites IRS.gov and FTB.gov. Some of the reasons for filing an amended return include, but are not limited to (1) correcting income, deductions, credits or other items incorrectly reported on an original return (2) changing your filing status (such as from married filing separately to married filing jointly – sorry you can't go the other way!) and (3) changing amounts previously adjusted (oftentimes incorrectly) by the IRS thus giving you a chance to show why their assumptions and changes could be wrong.
An amended tax return may be filed at any time if additional tax is due, but to obtain a refund of tax previously paid, the claim for that refund must be filed within three years (four years for California) after the original return was filed or within two years after the tax was paid, whichever is later. If a return was filed late, a refund claim must be filed within three years from the date the return was due (including extensions). There are some exceptions to the above rules, but you get the general idea. If there is an error in your return, it is best to file the amended return to correct the error. If you file an amended return, the IRS will charge you the tax and late payment interest. If they catch the error and you ignore their notice, they will add penalties to the tax and interest. If the underpayment of tax is "significant" (IRS definition of "significant" is understatement of the tax that is greater than 10% of the amount due or $5,000) the IRS can assess (and they like to) an "accuracy related penalty" of 20% of the tax underpayment.
Moats & Hebebrand CPAs hope this information has been helpful in determining what an "extension" is, whether you should obtain an extension to file your tax returns, if you should send a payment with your extension, and instances where you should file an amended tax return.