Tax Season Woes: What You NEED to Know about Filing Extensions
Blog Post #103Tax season can get overwhelming. There’s deadlines, rules and oh yeah let’s not forget paying money we don’t want to!! Sometimes though, despite our best efforts, we find ourselves needing more time to file.
This is where filing an extension can come into play. And while they prove helpful for whatever the reason we are held back from filing by the due date, extensions carry their own overwhelming factors. One of the biggest factors being that you understand (and something I had to learn the hard way) it's not just about buying extra time—it's about strategic financial management.
In this post, we’ll explore what a tax extension is, why you might need one, and how to handle one responsibly when and if you do.
But First, My Story: As a business finance professional, tax season is normally a busy time for me as I work with small business owners who need accurate and compliant financials to ensure they can file on time. The problem came from me putting myself at the end of the list so I can make sure my clients are taken care of. This made it easy for filing extensions to become second nature for me. And while I have no problem putting my clients first, I had to realize that I still need to put as much effort into myself as I do them.
Extensions have cost me much more time and money than necessary. Why is this? Well time wise, the longer I waited, the easier it was to push it off to the final deadline. Which eventually turns into anxiety because now I’m REALLY racing the clock.
Money wise, the more penalties incurred and the more interest on the money I owed. So one of the biggest lessons here is that if you owe the IRS, they want it. No matter if it's $1 or $1 mil, they want it. And the longer you hold back from giving it to them, the more they make you pay!!
So what did I do? I became my own best bookkeeper, started treating myself like a client and preparing for tax season is now a breeze!! No more extensions or late penalties or 6 months of interest on an owed balance.
What is a Tax Extension? It’s simply you letting the IRS know you need additional time to file your taxes for the year. It's important to note that this is strictly an extension of time to file, not an extension of time to pay any taxes you owe. THIS is crucial to understand as it can help you avoid potential penalties and interest.
Common Reasons for Filing an Extension. There are many reasons extensions are filed, and each can vary based on personal or business financial situations. But these are usually the most most common scenarios:
Awaiting Necessary Documents: Sometimes, you might be waiting on essential documentation that hasn't arrived in time, such as 1099s or K-1s. This is particularly important as a business owner to ensure your taxes are as accurate as possible, which helps you avoid other IRS dealings and penalties later.
Complex Financial Situations: Sometimes with more complicated finances, like multiple income streams, investments, or significant life changes (i.e., marriage, divorce, new baby, etc.) you might need additional time to compile and review their tax information.
Major Life Events: Life doesn’t pause during tax season. Events like a family emergency, a change in your financial professional or a natural disaster can disrupt your ability to do what you need. Usually the IRS has empathy with natural disasters, but even then make sure you completely understand your responsibility.
Advice and Strategy: You might need or want some extra time to consult with a financial advisor or tax professional. This could be to job promotions, income changes, or maybe you sold your home or invested in real estate, etc. and you want to make sure you’re taking advantage of all applicable deductions and credits.
Incomplete Records: Another big one for business owners. We all know bookkeeping is not everyone’s favorite subject. And if you are doing it yourself, you probably wait until tax time to do so. This causes you to not be able to file on time because you must have your records organize and accurate to file correctly.
How to Manage a Tax Extension Wisely. If you do find yourself needing to file for an extension, I encourage you to be familiar with your options plan accordingly. Here’s a few ways you can handle it responsibly:
Pay Any Owed Taxes: Of course this will be an estimate but you can use your previous year's tax return as a guide to estimate any taxes you think you might owe. Even if you can’t pay a large amount, pay something by the original deadline. This way any taxes you owe for the current taxes will be less and paying ahead can help minimize interest and penalties.
Know Your Forms: For personal taxes you will use Form 4868 and for businesses you will use Form 7004. This must be filed by the tax filing date, normally April 15th. I do suggest speaking with a tax professional if you have ANY questions about this.
Plan Your Time: Remember, just because you have six more months to file doesn't mean you have six months to pay. YOU SHOULD NOT WAIT UNTIL THE LAST MINUTE. Set a deadline for yourself, and work to have everything ready as soon as possible. The closer you file to the original deadline will also help you minimize interest and penalties.
Consult a Professional: ASK FOR HELP!! If you are not a qualified professional, no one expects you to just have the answers. So whether it’s organizing your finances and you need a bookkeeper or if you’re unsure how to estimate your tax liability, getting with the right professional is key!!
In Conclusion. I would like to remind you, filing a tax extension, if needed, is sometimes the most practical choice to avoid other issues and problems later. It’s just important have a clear understanding of what it really means, and making sure you manage your extension wisely.
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