Should I Be Afraid to File a Tax Extension (watch before April 15)

It is shocking to me how many people are literally having an aneurysm on April 1 that their taxes are not done yet. Knowledge reduces fear. Knowledge helps you succeed.

There are penalties for failure to pay, not penalties for filing the extension. Get your shiz together. You need that K1 from that investment you're in. You need the books done on that rental property.

It's like a cattle chute, you know, first in, first to the slaughterhouse. I want to be at the end of the line of that cattle herd. Why not buy yourself some more time to do it right and reduce your of getting picked for an audit. Welcome, everybody, to another episode of the Main Street Business Podcast. My name is Mark Kohler. I'm here with Matt Sorensen talking about that favorite topic of the year. It is tax time. It's like Christmas, right?

Yeah. If you're getting a tax refund, you might be excited. And you've probably already filed by now. For those of us that owe taxes or we're not sure whether we owe or not, we're not necessarily too excited about filing by April 15th. But the good news is the IRS is like, that's cool. You don't have to. You can extend, you can punt. You can punt if you want. So this is like fourth down territory, I guess. And you get to make the call.

You're on the sidelines, I kick the field going, hope for the baseline, maybe punt. And what's interesting, we're also seeing reports that tax return filings are down compared to the same date in the last preceding 10 years. And what's going on, A lot of people think, well, the IRS is going to get shut down or we're going to get this retroactive tax legislation. So why file? Yeah, I don't know. What do you think?

Well, you know, I think we're going to have an external revenue service, not an internal revenue service. That's what we're going here. I think that's, I mean, honestly, a lot of people are thinking that and it's trending out on social media. It's not likely to happen. And so, but there's some holdouts, of course. So I think there's a little bit of that going on. But I actually think savvy smart people are the ones extending.

Yeah.

And we do that. We extend our own tax returns. Most of our clients extend their own tax returns. Honestly, most business owners, I would say nine out of 10 business owners file an extension for their tax return for their business and for their personal return.

Yeah. And before we get into this list of should you file for an extension and definitely should not be afraid to. There's a lot of benefits to filing an extension I just want to take off the table. Do not be waiting to file or filing an extension or not filing an extension at all because you think the IRS is going away. That's a big topic for down the road and I don't think we're going to see that anytime soon. And even if we did, it doesn't mean you're going to get out of filing next month or in the next few weeks. So let's have the conversation of how to file an extension and why and not be thinking the IRS is going away. I don't waste any airtime on that. My first reason I like filing an extension is it just gives me time to prepare. So many people rush to file. They don't go look at that extra credit card statement or go through that bank account and look for better write offs. There's a lot that could be done to go harvest some write offs from last year.

Yeah. And I think a lot of people rush their tax return and you're missing deductions. I think most of us capture all of our income. That's the easy thing to capture. Right. But you forget the deductions. And when you're rushing, that's the stuff you miss out on. The most organized, the best well kept books for our clients are the ones that have the most tax write offs because they're tracking it better. But keep in mind too, I just want to say this also is like we're talking about extending your personal return due on April 15, but also, and that by the way, you get a six month extension. So that gets you until October 15th. But you also have to file an extension on your business return. If you're a partnership or an S corporation, you would have had to have filed that already in March, by March 15th.

Yeah. And we probably ought to address that. For those of you that are now like, oh my gosh, I have an llc. I missed that. But we'll come to that. But on this personal, I like that you went there, Matt, is that when you file an extension for your personal return, there is no penalty. It is a one page form. It's very, very easy and simple to do. And there's no cost to do it per se, except that you need to send in any taxes you think you might owe. Now this could be just a back of an envelope process. You're just like, well, here's what I owed last year, my last When I filed for the previous year. And I think I'm going to owe approximately the same amount. And so I'll send in that amount. And as long as you're within 10%, there's not going to be an additional penalty. So try to get as close as you can and just send in a little money. But it's not a bad thing by any means.

Yeah, so it's an extension to file, not an extension to pay. So you need to file that extension and that buys you time to complete your return and pick up all the deductions or other things. So you're ready, but you still need to pay that estimated amount and send that into the IRS by April 15th. And that's where I like where you're saying there, Mark, is look at what you did last year. How much was your federal tax owed last year? Were you about the same? Are you a little. Maybe you made twice as much than you did last year. That might mean you might need to send at least twice as much in and possibly more because you might be jumping into a higher tax bracket. Did you make less? You know, obviously. So you kind of need to throttle it and approximate that the best that you can. Because if you don't pay, there are penalties for failure to pay, not penalties for filing the extension. It's about the tax due, not when you file the damn return. So if I don't send the money in until October 15th and the IRS is going to charge you penalties and interest for that late payment.

Yeah, and I've got an article on three or four rules of thumb and ways to calculate what you think you might owe. So check that down in the show notes, but really easy to come up with that number. Now let's stay with this for a minute. This is really good point Matt made is there is a penalty and some interest for not paying everything you owed. But with your if you're within 5 or 10% of what you think you owe, that number is going to hopefully be very manage. And the penalty is a half a percent per month. I mean, it is not a lot. And so it's not the end of the world. The bigger penalty is failure to file. So this is like, you know, you go out on this nice date with the IRS and you're like, hey, I'm going to call you later. And then you ghost them. The IRS doesn't like that. You're like, hey, what's going on? You know, you said you'd call me. And so that's where the IRS gets really hung up with a much, much greater penalty. And you want to make sure you're on top of at least filing the extens. So you got six more months to play around with that. There's no penalty for that. It's the failure to pay penalty that'll kick in at a very nominal amount. And you have until October 15th to come through.

So you're saying if I go on a date and I say I call you, but instead of calling, I just send a text and I say, hey, I'll call you in six months, that, that works?

Well, it's better than the ghosting. You don't want your car keyed.

That's the case. I want to know what's the form text I file.

That's right. You know, to that date I'm going to just file an extension, but, oh, I'm going out of town. I had something come up. I'll be in touch. Okay, see, there you go. You file your. We ought to call it the extension text.

Okay, the extension text. All right. The same concept.

You don't have to make that call, you know, no follow up date yet.

You know, obviously good on tax advice here on this podcast, not so great on relationship advice. You're on your own there.

Now here's the other reason why I file an extension. And not only do I want to go get better record keeping done and try to dig up some extra write offs and be proactive. Here is you actually reduce your chances of an audit by filing an extension. It's like a cattle chute, you know, first in, first to the slaughterhouse. I want to be at the end of the line of that cattle herd because the IRS really does. And their regional offices starts assigning audits to their auditors based on the returns that have been filed. So when your return is not getting filed until August, September or October, they've already assigned the audits for the prior year and you're going to be in the queue for a second look computer based line item letter that you might get. And so you really avoid that first wave of audits. And this has statistically been proven with every tax software and tax research company out there. So why not buy yourself some more time to do it right and reduce your chance of getting picked for an audit.

Yeah, and I think a lot of us have, you know, we're invested in different things. You got rental properties, you might have businesses you might have K1s coming from, other things you're invested in and they file an extension. So sometimes you don't have a Choice, actually, you're like, I don't have enough accurate information, even file my dang return, so I have to file an extension. And that's me. I know for many of our clients you just have to file extension. It's not a choice. And so. But if you're in that boat, of course that's why the IRS created this. They know about this. And so I think some of you might be like, but I'm on it. I'm ready to go. No, you're not. You need that K1 from that investment you're in. You need that, you know the books done on that rental property. Just keep in mind, sometimes you might be forced into this too.

Yeah. Now, a third reason here, I'm just loving this because I think there's so many good reasons, is you may be looking at your tax return, talking to the same accountant you had the year before, and you're like, am I going to go down this road again? I didn't get a conversation. I didn't felt like I got any tax planning or strategy. And you had put off making a change with your tax advisor. And so now you feel forced to do your tax return with your accountant that you've been wanting to make a change with. File an extension, do it yourself, or tell that accountant, file an extension, then go on the hunt. Start interviewing other accountants to be your tax advisor that can prepare your return in the summer. By the way, if you're looking for a good accountant, you're not going to talk to them right now anyway. They're going to be busy trying to deal with their current workload and then they're going to open up the gates to go get better clients themselves. So the matchmaking process has not even started yet. So file an extension and get a ticket to that, you know, dating site, which is going to be the opportunity to have discovery call and sit down a little speed dating moment with a good tax advisor. We've got a whole network of tax advisors that speak Mark and Matt and that tax Pro network. You can get to it in the links below. And you can have a discovery call with an accountant that's got the time to have that conversation after the deadline.

Yeah, you know, it's interesting. Every good accountant is. I feel like they're like, it's always tax season. You know, it's like, well, when do I refer you new clients? You know, because they're like, Well, I got April 15th from January through to it's tax season. And then I filed the extensions and then I got till October 15, it's tax season. And then if you're a good accountant, between October 15th and December 31st, you're doing tax planning for all your existing clients. Because most tax planning happens before year end. So actually the sweet spot in my opinion, to find a great is in the summer. Yeah. Is the catch a little breathing room after October, after April 15, the extension deadlines not yet upon them. All the good ones are super busy. Year end if you're like. So I think it's a good time to find that right tax advisor. Catch your breath. You'll have you can get all your books in order and be organized on your end. And I think that process of finding a good tax advisor, you got to take some accountability too. Get your shiz together. Be ready to have a proactive conversation and be ready for the advice you're trying to receive. Don't show up with a message and be like, I thought you could, you know, you know, wave a magic wand and fix all this stuff. Get organized and take that time and start interviewing those people.

I'm. Gosh, man. So what you're saying is if I need a date for Friday or Saturday night, I don't start calling people on Friday afternoon. I want to go in the right window. Like maybe on a Tuesday, Wednesday, Thursday, say, hey, do you need to go to Target and run some errands? I'd love to go with you. Can we have a little, maybe a little lunch, drink or something?

Pro tip, Pro tip. Pro tip might work for you.

Yeah, Yeah, I think Tuesday, Wednesday. Those are the times to be planning your Friday night date. Not Friday at 4 o'. Clock.

You know, you have a lot more success that way.

I like that. Yeah. There's a window, there's a man. We are just changing people's lives because

the good ones are gone by Friday at 4:30. Same with accountants too, guys.

That's right. Start early. Oh my gosh. All right, now here's another point that is, if we haven't made this clear enough by now, it is shocking to me how many people are literally having an aneurysm on April 1 that their taxes are not done yet. Oh my gosh, people. And then come to find out they're calling my office. Over the years. We've had an accounting firm for 20 plus years and we would have people calling up, freaking out, I've got to get my taxes done. We'd start to do again, back of the envelope, you know, where are we out on your tax prep and where's your last year's return look like they got a refund coming. Oh, my gosh, you're freaking out. You've got a refund anyway. And they didn't even know that. They're just like, in a hurry. Like my mom and dad always filed by the April 15th. I gotta file by April 15th. The sky's gonna fall if I'm not done by April 15th. That's you. I am so sorry. This sounds a little harsh, but holy crap. Just take a chill pill, find out what you owe or not and file an extension now. If you are due a refund, I'm good with that. Let's get your return done. But you don't need to wreak havoc at your accounting firm. They are not going to appreciate it.

Yeah.

Jeez, Sounds like I've got some experience with it. Yeah. Yes.

Mark needed to get that out there.

Little PTSD maybe.

Yeah, we need to get that out there. So don't stress about the extension. Know this is something that works in your favor, actually. It helps keep better organized. You may need to do it anyways. Reduces your risk of an audit. And you have better opportunities to get good tax planning if you're filing the extension. So I want. I think it's like, instead of should I? It's like, why would you not?

Yeah, I think we did many times the math at our firm and we had 65% plus clients file an extension. And of course, we represent Main Street America, Main street business owners who haven't got all their K1s yet, they still are doing their books and tidying them up and looking for an angle. So very important that you not stress and hurt yourself by doing this. Now, a couple other important points. April 15th is also a good time to make any deposits into your retirement accounts. The Roth ira. Oh, love the Roth. You don't want to miss your backdoor Roth strategy for last year. This is something Matt and I teach constantly. And so if you've been fed the misinformation that you make too much money to do a Roth, or I have a 401k at work, I can't do a Roth, or both of those are deadly wrong. And so when you're filing this extension, it does not mean you file an extension to get that Roth contribution in.

Yeah, and so that's a great point. There are some retirement accounts like solo Ks, and that actually when you extend your company return deadline, you can extend the time to put the money in, particularly for employer contributions. But on the IRAs, it's like, even if you file the extension, it's still April 15th and right now is a great time. If you're listening to this here before for April 15, 2025, you can make your 2024 contribution and your 2025 contribution right now. And if you're doing the backdoor Roth IRA is just the example Mark gave there. I can get $14,000 in $16,000 if you're 50 or older right now that could be Roth dollars. And if you're married, that could be $28,000 or even over $30,000 if you're over $50,000. So the backdoor Roth is definitely something you want to consider by doing by April 15, even if you are going to extend it.

Man, I'm glad we just opened up this can of worms too because you've got your HSA contribution. That's the deadline's April 15th. But don't forget about your kids on this April 15th with their IRA accounts or the Coverdell Education Savings accounts. We have all those accounts. They can also be crypto accounts@directed ira.com but with your kids, you may say, well, I didn't get around to paying them out of my business last year. Did your kid have a paper route? Did your daughter do some babysitting? As long as they have any earned income last year that they could justify, they don't even have to file a tax return in most states by any means. So you could still be contributing for your kids Roth for last year and then doubling down on this one saying, well, I'll do it this year. Don't forget you can still grab some money for last year.

Yeah, that's such a great point. I forgot about that because we always think of the kids Roth, you got to get them have their earned income by December 31, you know, but there's so many. They do have the earned income. They have the summer job, the part time job in high school. You are paying out of the business. You paid them to mow the lawn at the rental property. You know what I mean? It was already done. And you can get those accounts going by April 15th too. So just keep in mind there are some stuff you can't extend in terms of tax deadlines. That be the retirement accounts, the Roths that we just talked about. HSA contribution deadline as long as you had the high deductible plan back in 2024, of course. So lots of great opportunities to get done by April 15. The extension is one. Don't sweat it.

Yes. Now let's hit one other topic and we mentioned we Would. And that's for some of you that have an LLC or corporation and maybe missed March 15th. Let me calm you down right here. Now that are having a little blood pressure moment. If you have a single member llc, no extension, you're good. A single member LLC is included in your April 15, 1040 extension. So any of you with a rental property, a small business single member llc, you're fine, do not worry about it. But if you have a two member LLC or an LLC taxed as an S Corp or an S Corp, that

was March 15, that was March 15 and you missed it. And so you need to file asap. You can't file the late extension to try to get the extension. So you just need to get on the ball and get that filed. You could still extend your personal though. Yes, of course. That'll buy you some time, let you focus, of course on the business return now and then you can come back, you'll buy yourself at least some time on the personal. Get that filed later now.

So you know what the penalty here is? It's not based on what the S Corp or LLC had an income. It's based on the number of shareholders or members of the LLC. It's around, I think $395 this year is the penalty per month per shareholder. The return is late based on a month or part thereof. Now what that means in English is on March 15, if you had two shareholders, that's a $700 penalty as long as you get it done by the end of March, because it's a month or part thereof. So if you're hearing this and you're like, oh my gosh, I'm already in April. I've got two members of this llc, my mom and dad or my brother or sister, my spouse, whatever, and I've got this two member LLC or an S Corp with two shareholders. If you got to file by the end of April and your penalty is still $1,400, that's approximately. So that's 395 per shareholder per month that the return is not filed. Now there is a first year abatement like this is the first time I didn't know. And you send in a letter, have your accountant do it. There's a special reference letter that you can send in and get out of that penalty the first time. But after that they're kind of like, didn't you learn your lesson? We're gonna slap your hand a little harder. So make sure you're. And I like what you said. Just get it done.

I didn't know that. First year abatements. That's great tip.

Yeah. I think you and I have used it. I didn't tell you I had your back.

Yeah, I don't want to know.

Yeah. Matt and I have different roles and responsibilities here. Don't ask, don't tell. You know, don't tell me if you don't need to. So. Yeah, yeah, but. But your point as well, I love. I want to reemphasize this. Just because you're late on your business and you got to kick out that K1, you business owners know what we're talking about. Don't delay on the 1040. It's okay. File that extension for your 1040.

Yeah. All right, well, I think we've nailed this. Yeah.

I'm trying to think if there's anything else that's.

Yeah, there's. I think the. The. I'll just sum it up again here, of course, is.

Oh, I got one.

Yeah.

You've got to set your. Set up your solo 401k for your sole prop by April 15th if you want to do it. Yeah, See, with the S Corp, you can set up a solo 401k up until September 15th if you file an extension. But for those of you that have a single member llc, you're like, hey, I want to throw down some money in my Roth and do a little Solo 401k for 2024. You have to set up the Solo 401k by April 15th. We can help you do that. You don't have to put the money in yet. Just get it set up by April 15th. So that's an important too. We love to self direct our retirement accounts. So when we're putting that money in, you don't have to put it in freaking Wall Street. Let's go buy real estate. Buy crypto. Lend it out to people. So many options.

Yeah, that's what we talk about all the time on our sister pod. The directed IRA podcast is how to execute on that. But that is. That is another little April 15th nuance that might have sound confusing with what Mark just said there, but the takeaway is. Is if you want to do a solo K and you're a sole proprietorship and you want to make 2024 contributions for whatever damn reason they said you've got to do it by April 15. Even though partnerships s. Corporations can file the extension and still set it up, it could be July and you're setting up your solo 401k for 2024 in your S corporation still making an employer contribution. You can't do your employee, but you need to do your employer contribution for 2024. So little nuances to the rules. Of course our team can help get over to our law firm, KQS Lawyers. We can help you through this stuff from all these tax planning opportunities you're going to have as you're buying time, filing extension, looking at the solo K, maybe looking at the tax planning opportunities, doing our overall tax and business consult. We'd love to help you there, of course. And that's our law firm, KQS Lawyers, where we're doing this every day.

Yeah. Thanks everybody for listening. Don't stress you're one of the leaders in your community. By listening to this podcast, you're being a leader of your family because you're getting in the know. Knowledge reduces fear. Knowledge helps you succeed. And I know sometimes it's a lot to digest all this, listen to it again, unpack it, find the right tax advisor. Check out our Tax Advisor network if you need that, and file that extension just so that you can level up. You don't have to be forced to work with someone you don't want to. So thanks for being here and we're going to see you next week for another episode of the Main Street Business Podcast.