Businesses may need to get tax filing extensions (AP)

Wednesday, March 31st, 2010 | Finance News

NEW YORK – With April 15 not far off, many small business owners will get six-month extensions of the deadline to file their income tax returns. This year, the procrastinators have company as the economy makes tax issues more complicated for everyone.

Changes in the tax laws due to economic stimulus efforts mean some owners need more time to gather information and complete their returns. And Edward Smith, a partner with the accounting firm BDO Seidman in Boston, noted that many companies have smaller staffs this year, so getting the 2009 books closed, a necessary step in the tax filing process, has taken longer.

"It doesn't leave a lot of time to do returns," Smith said.

Some owners routinely get an extension because it gives them more flexibility in funding certain retirement plans. This year, many others with cash flow problems will get extensions in the hope they'll have the cash to make plan contributions before the new deadline of Oct. 15 comes around.

Here's a short guide to getting an extension for filing your tax return:

THE MOST IMPORTANT THING YOU NEED TO KNOW

Getting an extension doesn't let you off the hook for paying your taxes by April 15. As the IRS says on its Web site, http://www.irs.gov, "an extension of time to file is NOT an extension of time to pay."

The government requires taxpayers filing for an extension to make a good-faith estimate of how much tax they owe and to pay that amount by April 15. If they don't, they'll have to pay late payment penalties and interest on their unpaid taxes.

Many owners are in the predicament of not only being unable to file their return, but also not having enough money to pay their taxes. They should go ahead and file for an extension, make an estimate and pay whatever they can. They also might want to apply for an installment agreement with the IRS.

The IRS does have an option for owners who are in extremely difficult circumstances. They can file form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. The form requires you to "provide a detailed explanation of the undue hardship that will result if you pay the tax on or before the due date." A general statement of hardship won't do.

You'll also need to give the IRS a statement of your assets and liabilities and an itemized list of your income and expenses for the past three months.

REASONS FOR GETTING AN EXTENSION — AND REASONS NOT TO WORRY ABOUT IT

If you're not ready to file because you've been dawdling or are disorganized, you probably should get an extension.

If you rush to meet the April 15 deadline, you risk sending in a return that has mistakes or omissions. You can amend your return, but many tax professionals believe that could raise your chances of being audited. It also costs your business time and money to correct and submit your return. So getting an extension and getting your return right may be a smart move.

If you don't have all your information together — for example, if you're trying to get up to speed on tax law changes, or waiting for a partnership return is completed — you should also consider an extension.

Extensions are also a huge help for employers whose cash flow is shaky and who want to contribute to retirement plans. The contribution deadline for many plans is the due date of the employer's return, including extensions. So those who opt for an extension have until Oct. 15 to get the money together.

Smith noted that some business owners get extensions as a matter of course because of the flexibility they offer on retirement plan funding. That trend helps puncture one of the big myths among taxpayers: that getting an extension makes you more vulnerable to an audit. Many business owners get extensions year after year, and the IRS doesn't have enough people on its staff to target everyone who gets more time to file.

Smith noted that the IRS doesn't select returns for audits until about a year after the filing deadline. The agency has a computerized system that pulls out some returns for closer examination.

"It's just apples and oranges," Smith said of the supposed link between extensions and audits.

THE MECHANICS

Getting an extension is pretty simple. A taxpayer needs to complete Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, and send it either electronically or by regular mail or overnight delivery service before the filing deadline. Be sure you get proof of mailing either from the post office or the delivery service you use.

Form 4868, which you can download from the IRS Web site, is short. You need your name, address, Social Security number and the estimate of your tax liability.

If you send a payment, you can either enclose a check with a paper Form 4868. Or you can use one of the payment services listed in the Form 4868 instructions.

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