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There are many reasons why an incorrect tax return is filed.
People can easily overlook some of their sources of income such as withdrawals from retirement account, unemployment benefits, and gambling winnings. Their income documents can be lost in the mail or misplaced. Additionally, some business owners rely on their 1099s received for reporting their income. Overlooking income can result in significant IRS penalties.
The IRS Substantial Understatement Penalty is charged if you understate your tax liability by 10% or $5,000, whichever is less. If you file a return with a substantial understatement, the accuracy-related penalty is 20% of the portion of the underpayment of tax that was understated on your return. Interest increases the amount you owe until you pay your balance in full.
Filing an extension can enable you to retrieve your IRS transcripts to ensure that you haven’t overlooked that has been reported to the IRS. Wage and Income Transcripts show all income that was reported to the IRS for the tax year. Generally, Wage and Income Transcripts aren’t available until May or June. Filing an extension provides time for you to access your transcripts and ensure that you have included all income that was reported to the IRS.
Form 1099s and K-1s are frequently corrected. If they are corrected after you file your return, you will need to file an amended return. If the amount of the change is a significant increase, you may be subject to a Substantial Understatement Penalty even though you filed your return with the numbers you were given on the original Form 1099 or K-1. Filing a superseded return will prevent the Substantial Understatement Penalty if you receive a corrected Form 1099 or K-1.
Filing an extension will increase the period in which a superseding return may be filed. A superseding return is one filed after an original return but prior to the due date (including extensions). A superseded return is treated as though it was the original return which will enable you to file your amended return as though it was the original.
Filing an extension does not prevent you from filing your return before April 15.
An extension for personal tax is filed on Form 4868. You can also get an extension by electronically paying all or part of your estimated income tax due and indicating the payment is for an extension.
Filing an extension does not delay the deadline for paying your tax. You should pay your taxes with the extension to avoid late payment penalties.
People often assume that filing an extension will make the IRS mad or increase their chances of being audited. However, this simply isn’t true.
Filing an extension is easy and automatic, and can be a valuable tool for filing an accurate return and avoiding penalties.
David Zubler is a nationally known tax accountant and Enrolled Agent who resides in East Tennessee. David can be reached at (865)363-3019 or by email at david@yourtaxcare.com.
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