More Likely to Seek Tax Extensions

In a normal tax season, Los Angeles accountant Irvin Pomerantz has about one in five of his clients request extensions to file their returns after the April 15 deadline. But this year, he thinks as many as half may seek extensions.

“Calling this simplification is an insult,” says Pomerantz, noting that computer software problems and client procrastination, due largely to complex changes in tax laws and forms, are contributing to the filing delays.

Thanks to tax reform and the resulting bewilderment, more and more taxpayers nationwide are expected to file late this year. The Internal Revenue Service expects 5.5 million taxpayers to seek extensions for 1987 returns, up from 5 million for the previous year. Others think the number may be higher.

Reasons for extension requests run the gamut, from delays in taxpayers receiving their K-1 income statement forms from limited partnerships to glitches in computer software used by many tax-return preparers.

Fortunately, getting an extension is a relatively easy process.

The most common way is to file Form 4868, a one-page document that, if filed by April 15, may give you a four-month extension to file Forms 1040 or 1040A. No explanation for your delay is needed. However, you must estimate what you still owe in taxes and send that amount in with the form or the extension won’t be approved.

The form “is an extension to file, but it’s not an extension to pay,” says IRS spokeswoman Shirley Nakagawa, noting that many taxpayers mistakenly think the process also allows them to pay later.

If you don’t pay by April 15, or what you pay turns out to be less than 90% of what you eventually owe when you file your return, you will be subject to a late-payment penalty. It runs 0.5% of the tax owed per month, or fraction of a month, up to 25%.

That penalty rises to 1% per month, or fraction of a month, once the IRS sends you a notice of its intent to levy your income or assets for the amount due. That levy comes after five notices that you owe tax, usually about five months after you file your return.

In any case, you will be charged interest for late payments.

If you think you may need to file 4868, pick one up soon. If you call the IRS form-order line at 1-800-424-FORM, you must hurry because it could take as long as 10 days for delivery.

Want to delay paying your taxes as well as postpone filing? Being out of the United States and Puerto Rico on April 15 might give you an automatic two-month extension to file and pay taxes due. (Although you still will be liable for interest from April 15.)

But simply crossing the border into Tijuana for lunch on April 15 won’t do. Under a new rule expected to be issued soon that cracks down on those abusing this extension, the IRS will require that you must be out of the country for at least 14 continuous days, including April 15. (Shorter periods out of the country might be acceptable to the IRS for “reasonable cause,” such as if your mother living in London became gravely ill on April 14 and you had to fly there to take care of her.)

To claim this extension, attach a note of explanation when you file your return on or before June 15, including a description of when you left the country and when you returned. Save your hotel receipts, plane tickets or other proof in case you are questioned.

If you take this two-month extension and still need more time, then file Form 4868 by June 15 and you may get two more months.

Still need more time? Then file Form 2688. That gives you two more months, until Oct. 15. Except this time you must state why you need an extension, subject to IRS approval.

Many alibis are acceptable, as long as they are adequately explained. Acceptable excuses include not having all your K-1 forms, undergoing a lengthy surgery and recovery, or losing your records because your accountant left town and you can’t find him. But just saying you were confused, or didn’t have the time, or your preparer was too busy--without more elaboration--is not sufficient, IRS spokeswoman Nakagawa says.

“The IRS is fairly reasonable. As long as you paid in your tax (with Form 4868), they don’t get upset” and will accept most legitimate excuses, says Ted R. Roth, partner at the Los Angeles accounting firm of Roth, Bookstein & Zaslow.

You’ll be notified by the IRS if it approves your request. If not, you still might be granted a 10-day grace period to file.

Extensions beyond Oct. 15 generally are not possible.

Note: If your children need to file tax returns, they are under the same rules as adults for extensions and penalties.

Will filing for extensions increase your chances of an audit? No, IRS officials and tax experts say. “It really doesn’t make any difference; it is what’s on the return that makes a difference,” the IRS’ Nakagawa says.

What if you don’t have the money to pay on April 15 (or June 15 if you were out of the country)?

Some accountants say their clients are intentionally not paying on the deadline, willing to incur late-payment penalties while they gather the cash.

But you should still file your return and at least pay what you can afford by the deadline. Not filing a return can result in a costly penalty of 5% of the tax owed per month or fraction of a month, up to maximum of 25%.

If you can’t pay all of what you owe and would like some relief, call or visit your local IRS office. You may be asked to fill out a financial statement form stating your income, assets and other relevant information. If you aren’t a habitual tax dodger, the IRS may allow you to pay on an installment basis, although you still will accrue interest.