Archive for the ‘April 15’ Tag

It’s Friday April 15 and Taxes Aren’t Due?

Originally published in the Cedar Street Times

April 15, 2016

If you were (or still are!) a last minute tax return filer, you may have some pleasant news this year – you have three more days to procrastinate!  If you are reading this article on April 15, you might be wondering, “Why is it a normal workday, and my taxes are not due?”

The answer is “Emancipation Day.”  No, we are not talking about emancipation from taxation, but emancipation from slavery.  On April 16, 1862, President Lincoln signed the District of Columbia Compensated Emancipation Act.  This act freed slaves in Washington, D.C., and compensated the prior slave owners for having to give up what was perceived as a financial loss.  This was the only instance were prior slave owners were compensated by the federal government.

The importance of the District of Columbia Compensated Emancipation Act is that it was seen as the first major victory that led to the abolition of slavery.  There had been attempts in the past to accomplish similar feats, but they had all failed.  In fact, when Abraham Lincoln was still a Senator, he tried in 1849 to accomplish this task, but it did not get enough votes to pass the legislature.  Even the decade prior to that saw several failed attempts spearheaded by others.

The District of Columbia Compensated Emancipation Act served as a precursor to the much broader Emancipation Proclamation, nine months later, that freed all slaves in Confederate territories.  Whereas the District of Columbia Compensated Emancipation Act freed about 3,000 enslaved people, the Emancipation Proclamation freed about three million enslaved people!

The Emancipation Proclamation, although often thought of as abolishing slavery, did not actually do so.  It was a wartime power instituted by Lincoln (not voted on by Congress), and it only freed slaves in the Confederate territories that were rebelling.  There were still four non-Confederate states in the South where slavery was legal, even after the Emancipation Proclamation.  It was not until the 13th Amendment to the Constitution was passed, and then ratified on December 6, 1865, that slavery was officially abolished in the United States.

The District of Columbia Compensated Emancipation Act, although celebrated in various capacities since 1862, did not become an official legal holiday in Washington D.C. until 2005.  The first year the tax return filing deadline was changed was for the 2006 tax returns due April 17, 2007.  Since the Emancipation Day Celebration fell on a Monday, and the IRS deadline is always the next business day if the 15th falls on a nonbusiness day, the due date was bumped to Tuesday the 17th.  That year, only Washington D.C. residents received an extra day, and everybody else still had to file on April 16.

Tax year 2011 was the next conflict, and the first time the whole country received an extra day, and is just like this year where April 15 falls on a Friday.  Whereas, the IRS moves their due date to the next business day when April 15 falls on a nonbusiness day, the Emancipation Day celebration moves to the prior business day.  Since April 16 was a Saturday in 2011, as it is now, Emancipation Day moves its celebration to Friday April 15, and then the IRS turns around and says, “Okay, today is a holiday, so we move our due date to the next business day,” which results in Monday the 18th!  Phew!  And fortunately California says, “We will just do whatever the IRS does,” – a rare but appreciated concession in a state that enjoys nonconformity.

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

What Does a Tax Accountant Do After the Last Return is Filed on April 15th?

Originally published in the Cedar Street Times

April 17, 2015

 

As I am writing this article, it is the evening of April 15.  Phew!  I decided to take a break from the Back to Basics series to pen a sigh of relief.  Every tax season has its own unique flavor, its own sense of flow and timing, and its own trials and tribulations, but one thing they all have in common is an end date!  “End date,” is a rather soft term as there are lots of extended returns to complete during the rest of the year, but the most intense time is over.  Sometimes people assume we all have our airline tickets in hand and head off on vacation the very next day.  Only once have I tried this…we left for a vacation on April 18th – but it was just too rushed!  The reality is that there will still be a flurry of activity over the next few weeks finishing up returns that were close to completion.   But the majority of extended returns will be completed later when missing information rolls in.

Sometimes early filers think that only lazy people extend their returns (!), but that is far from the truth.  There are many people who are waiting on required information that is beyond their control, and that information may not show up until the summer or even the fall.  And occasionally, you will have legitimate situations where required information does not come until after the extended due date in October!  For some people, filing an extension allows them to work on their tax details when their business or personal life is slower.  And yes, there are the procrastinators as well!  But whatever the reason, it is necessary to have extenders, as there is no way tax preparers could prepare every tax return in America by April 15th – especially when Congress is still changing the rules well into January in some years, and then not requiring reporting to taxpayers until late February or March in some situations.  Even with extensions, I would love to see America move to a system that spreads return due dates throughout the year, perhaps based on birth dates, or something of that nature.  It would be better for taxpayers, for the taxing authorities, and for tax preparers.  Maybe I need to run for Congress.

All of this said, I always take April 16th off as a personal day.  It just helps to decompress.  So what am I doing?  I am taking my three-year-old son, Elijah, in the morning to his first gymnastics class.  We will then rendezvous with Mommy and nine-month-old Claire at an increasingly familiar dining establishment Elijah calls “Old McDonald’s,” and learn about Mommy and Claire’s time at Parents’ Place in Pacific Grove.   In the afternoon, the kids will go to daycare for a few hours while Mommy works.  (I half-cringe, every time I use the word “kids” in reference to my children as I had a Political Science teacher in college that wouldn’t tolerate that reference and would always let us know that kids are baby goats.  But as one of my English professors in college also said, once you know and understand grammatical rules, then are you free to break them!  I like the word “kids,” and I’m sticking to it…besides, a nine-month-old eats anything it can put in its mouth anyway – very goat-like.)

This leaves Daddy all by himself for an afternoon!  If it is a nice day, I may take the motorcycle out and cruise down the coast, or maybe play a round of golf.  Of course, I will bring my wife some flowers, but I won’t be doing taxes!

We will take a vacation, but not until May, when we head down with some friends and take our “baby goats” to graze in Disneyland for the first time!  That should be fun!  We will also fit in a third birthday party for my son who turned three on April 3rd.  For some reason, Daddy was not able to fit a party into his schedule in early April…sorry, but you are going to have to get used to it kid – besides you were the one that decided to be born two-and-a-half weeks early even though I clearly explained all of this to you while you were in the womb!  Elijah loves fire trucks, so we want to extend a special thank you to the people at the Pacific Grove fire station who have agreed to host a bunch of three-year-olds!

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Back to Basics Part XIII – Form 4868 Application for Automatic Extension

Originally published in the Cedar Street Times

April 3, 2015

Two weeks ago we discussed underpayment of estimated tax – a penalty that is assessed prior to the April 15 due date if you did not pay enough tax in ratably throughout the prior year.  Essentially these penalties are the equivalent of the taxing authorities wanting to be paid in installments rather than a lump sum check at the end of the year.  (You would be equally upset if your employer only paid you once a year as well!)  So they effectively charge you interest (currently a three percent rate) if you do not have enough tax paid in quarterly throughout the year.  This week we are going to talk about filing an extension and the penalties and interest that you will incur beginning after April 15 if you do not file and/or pay on time.  If you would like to catch up on our Back to Basics series on personal tax returns, prior articles are republished on my website at www.tlongcpa.com/blog .

The most important piece of advice is to file your return on time!  When I say on time, I mean by April 15, or if you file a valid extension, then by October 15.  In years where those dates fall on a weekend or holiday, the return due date is pushed to the next business day.  There can be hefty penalties for filing a late return, which we will discuss later.   Form 4868 is the federal form used to apply for an extension, and you have to postmark it by April 15 for it to be valid.  If you are concerned of a postal mishap, U.S. certified mail is the correct way to document it was mailed on time.  California gives you an automatic six month extension if you need it, and nothing is required to be filed to receive the extension.  (Note there are exceptions regarding extensions for individuals out of the country on April 15, as well as for military people overseas, which we are not discussing in this article.)

Regardless of whether or not you file an extension, the tax is still due on April 15.  So you want to be sure you have enough tax paid in to cover the liability when you finally do file the return.  This means, you have to do a rough calculation at least, and then send in a check for the estimated tax with the 4868.  It would be prudent to estimate on the high side if there is any doubt.  If you end up not owing as much as you paid in, you can get a refund when you file the returns, or you can have it applied to the next year’s tax returns, and it will be credited to you as of the original April 15 due date when the first estimated tax payment was also due for the current year taxes (for those that pay quarterly estimates, this is very helpful).

When putting people on extension that pay quarterly estimated taxes, I will typically have them pay the remaining projected balance due from the prior year, plus the first quarter estimate for the current year and have all of this applied as a payment towards the prior year return.  This gives them a cushion in case the estimates are wrong.  Then, after the returns are filed, any leftover amount is then applied to the current year return and gets credit as of April 15 and everything is fine.  If you project you will owe to California, then you will have to fill out a California Form 3519 Payment for Automatic Extension for Individuals and remit a check with that form.

The mechanics of filing the federal Form 4868 are quite simple.  On the left side of the form you fill out your name, address, and social security number.  On the right side you list your estimate of your total tax liability, the amount you have paid in so far, and then subtract the two to get the estimated amount you are short or over.  If you are short, then you write in how much you are planning to pay with the extension.   Hopefully you have enough to pay the balance, but if you do not, just pay what you can, and keep making payments when possible.  Write your name, social security number, the year for which the tax is due and “Form 4868” on the check as well.

The California Form 3519 Payment for Automatic Extension is quite simple also.  You do not even have to list estimates, but just the amount you are paying in addition to your name, address, etc.  You would provide similar information on your check to California as well.  Federal checks are made out to the “United States Treasury.”  California checks are made out to the “Franchise Tax Board.”  The mailing addresses are on the forms and related instructions, which can be downloaded online for free. If you are sending in a check for a married filing joint tax return, it is best to put both taxpayer names and social security numbers on the forms AND on the checks.

Now let’s talk about what penalties and interest you will incur if you do not file on time and/or pay on time.

Late Return Penalty

As I mentioned earlier, the most important piece of advice is to file your return on time!  A late tax return with the IRS carries a hefty penalty of five percent of the unpaid tax PER MONTH or portion of a month until you file your tax returns.  For those of you who aren’t doing the math in your head, that is the equivalent of an annualized interest rate of 60 percent per year (and you thought credit cards were bad!).  Fortunately they cap that penalty after five months of delinquency thus maxing it out at 25 percent.  Not to be left out, California conforms to this and charges the same for late returns based on the amount of California tax owed.

Late Payment Penalty

Regardless of whether or not you file an extension, if you do not pay the tax by April 15, the IRS will assess you 0.5 percent PER MONTH on the unpaid tax, capping out after 50 months at 25 percent.  If the return is also delinquent (no extension filed), the five percent per month late return penalty includes the 0.5 percent per month late payment penalty for the first five months.  After the first five months, then you only pay the additional 0.5 percent late payment penalty.  So the maximum federal late return and late payment penalty could be 25 percent late return penalty (4.5 percent plus 0.5 percent for five months) plus another 22.5 percent (0.5 percent per month for the next 45 months for the continuing late payment penalty) equals a total of 47.5 percent.  California has a slightly different approach on this and immediately charges five percent of the balance if you are even one day late.  In addition they assess 0.5 percent PER MONTH or part of a month for the first 40 months, also capping you at 25 percent.  So one day late in California will actually cost you 5.5 percent in late payment penalties.

Interest

In addition to the above penalties, interest is also charged starting on April 16 until the taxing authorities get paid in full.  Since you had the use of the money and they did not, they want to be paid for their lost use of the funds.  The interest rate varies and is adjusted each quarter for the IRS and twice a year for California.  The current interest rate is three percent for both the IRS and California.  If you had the money sitting in a bank account, you clearly lost out, however, if you had it invested in the markets, you would have probably come out ahead in the past few years.  Whereas, you can sometimes get the taxing authorities to waive penalties if you had reasonable cause, interest is virtually impossible to waive.  Without the before mentioned penalties, there are many people that would love a three percent loan!

If you have noticed a common thread for the above interest and penalties, it is that they are all based on the amount of tax you were short starting on April 15.  If you had paid in more than enough on April 15, there would be no penalties and interest, even if you did not file an extension.  Theoretically, you could file several years late and incur no penalties as long as you eventually give them a return showing all the tax had been paid in on time.  I do not recommend this practice, however!  Eventually you would receive notices and they would even estimate a tax return for you and assess tax, penalties, and interest.  Those are usually not in your favor!  Also, you never start the statute of limitations running, so you keep yourself open for audit longer.

Most importantly, like me, have fun when you are preparing these forms.  If you find all of this interesting, perhaps you should have become an accountant!

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Filing an Amended Tax Return

Originally published in the Cedar Street Times

May 2, 2014

It’s May!  The sun is shining and the grass is green.  There is plenty of daylight in the evenings and summer is just around the corner.  You even have your tax returns complete.  Things are looking good!  As you mosey out to the mailbox and pull out today’s haul, you see a letter with an unusually interesting stamp, one kind of like your dad used to collect…then it hits you, “Wait a minute, did I claim the deduction for donating Dad’s stamp collection to the museum!  I even spent $300 on the appraisal, and I completely forgot about it!  And my taxes are already done!”

Fortunately for the hypothetical you as well as everyone else, there is a cure-all remedy elixir called an amendment.

The Internal Revenue Service (IRS) provides form 1040X and the California Franchise Tax Board (FTB) provides form 540X to facilitate this process for individuals.  The ‘X’ comes from the fact that you must be eXtra crazy to want to do your taxes again.  Actually, I have no idea where the ‘X’ comes from, but it is probably rooted in something – just like 401(k) plans.  Many people don’t realize 401(k) is simply the Internal Revenue Code Section that lays down the rules for that particular type of retirement plan.  Somebody was not having a creative day when they came up with that one.  But I digress…

The IRS version and the FTB version of amendments follow a similar format with a column of the original amounts reported, a column for the net change, and a revised column.  They do not cover all lines in the tax returns, however, but selected key lines as well as subtotals for other things.   Any affected schedules and statements are re-prepared in full in the corrected manner and attached to the returns.  The returns must be paper filed, and if there are changes to amounts reported for tax withholdings, the physical copies of the forms showing the withholdings must be attached.

Simple math errors are generally corrected by the taxing authority computer systems, and a change letter is sent automatically, so you generally don’t have to file an amendment if for some reason you noticed an arithmetic error on the return.  With computer tax preparation so prevalent, it is rare to see this unless the return is hand-prepared.  As a side note of interest, every client hand-prepared return I have re-prepared in the past ten years, aside from something basic like a single person with a W-2 or a pension, has had preparation errors – a tribute to the complexity of our tax code today.

If you missed something large and underreported your taxable income significantly, it is to your benefit to amend as soon as possible as interest and penalties will continue to grow.  You could also be assessed a 20 percent accuracy related penalty.

The IRS generally gives you three years to file an amendment and the FTB gives you four years.  More specifically and to illustrate, if you filed your 2013 1040 return on or before April 15, 2014, you have until April 15, 2017 to file your 1040X amended tax return.  If you filed for an automatic extension until October 15, then you have until the earlier of 1) three years from the date you actually file the return or 2) three years from October 15.  If however, you are delinquent on paying the tax you owe, and you have an outstanding balance that carries on for a period of time, that time frame could be extended as you have at least two years (one for California) after the date you actually pay the tax to file an amendment.

After filing an amendment, don’t hold your breath waiting for a response, as it typically takes two or three months to process the returns.  If you are curious, however, you can check the status of your return at http://www.irs.gov.

I have worked with quite a number of people over the years where we have gone back to file amended tax returns to claim missed deductions from the past and obtain a refund.  If the amendment can yield a greater refund than the cost of preparing the amendment, it is certainly worth considering!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Tax Deadline Looms

Originally published in the Cedar Street Times

April 4, 2014

If you have been hibernating through the winter months, it is time to awaken from your slumber and complete your tax returns for 2013.  As a tax professional it is interesting to see how each tax season seems to take on a flavor of its own.  This year I found that many clients did not come in early, but delayed gathering their tax information, and came in much later.  Another professional in the area called me last week and said he was experiencing the same issue.  Compressing an already compressed time frame certainly makes for long hours, and will probably lead to more extensions as well.

Over the past few years, new rules have been phasing-in which force financial companies to report cost basis in the stock they sell on your behalf.  (Generally I like this new requirement as I have to repaint my ceiling much less frequently as clients are no longer staring at it so intently to come up with the basis in the stock they inherited  thirty years ago.)  I recall last year, we had many clients with revised 1099 financial packages being issued well into late March.  Although I did not see a lot of late issued/revised financial packages this year, I have a feeling that has something to do with why many people opted to bring in their information later.

Technically, you are supposed to file an amendment if additional information surfaces that was not reported on your original returns.   This can be cost prohibitive, however, especially if it consists of minor changes.  If these items are missed, sometimes the IRS will just send a proposed adjustment and basically rework the tax return for you and propose a balance to pay.  California’s Franchise Tax Board will typically follow-up as well once they get wind of the issue from the IRS..

If you cannot get your returns completed on time, then you may wish to file an extension.

If you are filing your own extension for your personal tax returns with the IRS use Form 4868.  Be sure to get some kind of proof of delivery and make a copy of the extension.  Even with delivery confirmation it is difficult to prove what you sent.  The best way is to e-file the extension through home-use tax software or by using a tax professional that e-files and obtains an electronic submission ID (the new modernized e-file system replaces the old declaration control number system with submission IDs).  What about California?  In the midst of a tiresome sea of nonconformity with the IRS, I continue to applaud California for this one act – you need not file a form to be granted an automatic extension! After you have filed your federal extension you have until October 15, 2014 (six months) to file your California personal return as well.

BEWARE!!  Just because you file an extension does not grant you additional time to pay!  The tax you calculate on the return you are going to prepare and file by October is still due by April 15.  So if you think you might not have enough tax withheld, you need to make some good estimates and send in some checks.  You may want to hire a tax professional to help with this calculation.  You can send the federal check with Form 4868.  For California, you can use FTB Form 3519 to send with your check.  There are also electronic options for paying both of these.

If you do not pay your tax or file your return on time, interest and penalties are calculated based on any amount of tax you come up short. Interest varies with market changes (currently three percent a year for the IRS and California).

If you file an extension, but do not pay in enough tax by April 15, you will pay late payment penalties and interest.  The IRS late payment penalties are a half-percent of the balance each month (up to 25 percent).  California will charge you five percent up front plus another half percent of the balance each month (up to 25 percent).

If you fail to file an extension or file after the extended due date, the IRS and California penalties are each five percent of the balance each month (up to 25 percent).  California has an additional trick.  If you extend your return and then file late, they go all the way back to the original due date to calculate penalties and interest owed as if you never had an extension.

You may also incur underpayment of estimated tax penalties depending on your circumstances.

One other nice thing to know: if you owe no tax, you will owe no penalties, even if you file late.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.