EDUCATION CENTER
GTT RESOURCES: EXTENSIONS

April 15th is the tax deadline for individuals and partnerships; S-Corp tax returns are due March 15th.

Many business traders are not ready to file their tax returns by April 15th for a variety of reasons. Many brokers send "corrected" 1099s very close to the deadline (even afterwards), K-1s from investment partnerships are often late as well; plus it's just so darn confusing and complicated to prepare a business trader's tax return on time.

No worries. Most business traders, sophisticated and/or wealthy taxpayers file extensions every year on April 15th. Valid extensions give taxpayers 6-months of additional time to file tax returns (until October 15).

Contributions to SEP IRA and Mini 401k retirement plans are also allowed up until the extended due date of tax returns. That's not the case for traditional IRAs and Roth IRAs; you must contribute to these plans by April 15th. Note that Mini 401k retirement plans had to be established before year-end; even with just a few dollars. SEP IRA plans can be established up until the due date of the tax return including extensions. Click here to learn more about retirement plans for traders.

Before we go further on extensions, traders should also strongly consider filing an IRC 475 MTM election for the current tax year by April 15th. Simply attach a MTM election statement to your federal tax extension. No worries about the Form 3115 (Change of Accounting Method); that form is not filed until next year, when you file this current year's tax return. Learn much more about MTM in our books and guides.

Don't take extensions lightly and understand how they work and don’t work for you.

The IRS understands that it’s impossible for many taxpayers to file accurate tax returns by April 15. It’s a short a time after year end; especially when you consider all the pieces of the puzzle (tax return) that need to be assembled and received from third parties (who are often late themselves).

So here’s the IRS deal on extensions.

You need to do a “proper” estimate of your tax liability using “reasonable good faith”, based on all information available at the time of the extension. You also need to gather all information available and do your accounting work as best you can; you can’t just argue it was too difficult. Relying on a professional for this estimate with the extension shows reasonable good faith on the part of the taxpayer, even if the professional is wrong.

Next, you need to report IRS payments for the year; including overpayment credits, withholding tax and estimated tax payments.

Finally, you calculate the difference and that’s the amount owed with the extension.

Capture the above three amounts on a simple one page Form 4868 “Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return” available at www.irs.gov.

You need to file (postmark) this Form 4868 by April 15th (and not a day later) with your same IRS district.

If you satisfy all of the above extension requirements, you will have protected yourself from the late filing penalty of 5-percent per month (up to 5-months of 25%).

But some taxpayer’s can’t afford to pay all or some of their taxes owed with the extension.

Any tax amount paid after April 15th is subject to interest plus a late payment penalty of 0.5-percent per month up to a total of 25%.

Note that the late payment penalty is much lower than the late filing penalty of 5-percent per month.

If you satisfy all of the above extension requirements and pay at least 90-percent of the amount owed with your extension, then the IRS should waive the late payment penalty as well; providing you pay the balance owed with your tax return by October 15th.

For these reasons, over the years, we have always advocated paying 90-percent of taxes owed with extensions to avoid all penalties of any kind; and to reduce interest charges as well. Note that interest charges and penalties are not tax-deductible.

If you can’t afford to pay at least 90-percent of what you owe with the extensions, then see some new options from the IRS recapped below.

Here are some important questions for traders.

Should a trader conserve their trading capital and skip the extension payment owed; thinking it’s a bargain to pay the interest and lower late payment penalty? Should a trader purposely underestimate their tax liability to pay less with the extension?

The answer to both these questions is NO. You need to read the extension rules a little closer to understand that a purposely under-estimated extension may render your extension invalid (null and void - as if it were not filed).

That subjects you to having to pay the higher late filing penalties of 5-percent per month; plus the late payment penalties of 0.5% per month.

If you can afford to pay what you owe and simply chose not to, the IRS may consider that “bad faith” and again, nullify the extension filing. Conserving working capital to trade may be a reasonable excuse under certain conditions. You should consult a tax advisor.

We provide you with various extension resources below.

Click here to read an interest in-depth article on the above nuanced rules.

Active Trader magazine article by Robert A. Green, CPA:
BEFORE and AFTER... For traders, there's still plenty of work to be done before April 15. Before you can even consider filing a return, you need to know where you stand on issues such as trader tax status and mark-to-market accounting. Deal with those concerns now, then file an extension and worry about the tax return later. The MTM election statement and much more is included in our trader tax guides and book.

Payment Options Available for Those Who Can’t Pay in Full.
IR-2008-56, April 7, 2008. Click here for this page on the IRS site.

The IRS has reminded taxpayers who owe taxes but are unable to pay in full by the April 15 that several payment options are available. Generally, taxpayers should file their return on time and pay as much as they can with their return to limit interest and penalties for amounts not paid. However, members of the military serving in combat-zone localities and taxpayers in certain disaster areas can wait until after April 15 to file and pay.

Taxpayers who need more time to pay their taxes may be eligible for an extension of time up to 120 days to pay. Individuals can request an extension of time to pay by using the Online Payment Agreement link at http://www.irs.gov/individuals/article/0,,id=149373,00.html.

Taxpayers may also apply for an installment agreement by using the on-line payment option or by attaching Form 9465, Installment Agreement Request, to the front of their tax returns. No fee is charged for the payment extension, but a user fee will apply for an installment agreement. The amount of the fee is dependent on the method of payment. While interest still applies whether a taxpayer is eligible for a payment extension or installment agreement, penalties are cut in half.

How Extensions work:

Per the IRS site: "Interest and penalties add up for people who don’t file and pay on time. But taxpayers can limit these charges by filing on time and paying sooner. Though interest, currently at the rate of 6 percent per year and late payment penalties, normally 0.5 percent (1/2 of 1 percent) per month, apply to any tax paid after the April 15 deadline, taxpayers can limit these charges by paying sooner. In addition, by filing on time, a taxpayer avoids the much larger 5-percent-per-month late-filing penalty. For example, a taxpayer who lies on May 1, owing $1,000 in tax, would be charged interest plus a $50 penalty."

Our Observation: If you don’t file an extension or a tax return by April 15th, you will be subject to "late filing penalties" (5-percent-per month up to 5-months), plus "late payment penalties" (0.5% per month); assessed on any tax balance due. Read more about IRS penalties and interest rules here.

Protect yourself from the higher late filing penalty of 5-percent-per month by filing a timely extension by April 15th.

It's best to play it safe and pay 100 to 125 percent of your estimated liability. This gives you a cushion for errors in trade accounting, and any overpayment can be applied to current-year estimated income taxes (especially if you are profitable in the first quarter of the year).

A good rule of thumb for traders is to pay your taxes on a conservative basis (to avoid interest and penalties) but file your tax returns on an aggressive basis (because that’s where the real savings are).

File an Automatic 6-Month Extension by April 15.

We recommend Extensions for many Taxpayers and Traders.

In our opinion there are many advantages and no disadvantages to using Extensions.

Special reasons why an extension is wise.

GreenTrader Extension filing strategies.

The consequences of not filing an extension and filing a "late" tax return.

Extension Chart: Federal filing extension accepted as state extension.

If you have any questions, e-mail info@greencompany.com or call us

Ready for a consultation

Automatic Extensions

If you are not ready to file your individual income tax return by April 15th, the due date, you are entitled to file a federal Automatic Extension by April 15th. Some states accept the federal extension but most require their own form.

Filing extensions by April 15 automatically changes your tax return due date to Oct. 15th.

For more information, extension tax forms or help from us with Automatic Extensions, click here.

Why we recommend Extensions for many Taxpayers and Traders

With the Automatic Extension, you get an additional six months to work on your tax return. We need this additional time to make sure the tax returns for our Trader Clients are accurate and have the best tax savings results.

Many traders have trading losses. Many of these traders with mark-to-market (MTM) accounting will be entitled to file a Net Operating Loss carryback refund claim on Form 1045. See our article in Active Trader magazine explaining what a Form 1045 carryback claim is ("Get the refund you deserve..."). Filing a Form 1045 refund claim is tantamount to filing amended tax returns for your prior two tax years. This process takes time and requires care. Additionally, the IRS will review these Form 1045 refund claims, and we believe you are better off waiting until after April 15th, when fewer agents are around to look over returns. This same concept works for all taxpayers.

Most Traders have complex tax files because they have Trader tax status. Traders usually don't complete their own trade accounting and record organization until the middle of March. We, the tax preparation firm, don't receive your tax information until March. We then only have one month to complete your tax return.

Often times, we need to request additional information from you. For example, if you have elected MTM, you might not have handled the opening and closing MTM values correctly. If you are cash basis (i.e., you haven’t elected MTM), you might not have handled wash sales correctly. Maybe you have not taken full advantage of home-office deductions and all the expenses you are entitled to. We need more time to work with you to get it all right and prepare the return that is most advantageous to you.

Many of our trader clients elected MTM accounting for the first time. This requires additional work on our part – we have to prepare a Form 3115.

New reasons why an extension is wise.

There are other good reasons to file an extension by April 15th:

The IRS announced significant new exam targets, policies and procedures – random audits (exams), more audits of high net-worth taxpayers and more. The IRS needs to balance its budget, so suffice to say, it is back in the exam business with a vengeance.

The IRS is more interested in examining business traders, part-time traders and money-losing traders. Click here to learn more.

Considering these developments, it is more prudent than ever to file extensions and mark-to-market (MTM) elections by April 15. This will then allow traders to file their actual tax returns in the summer months or even as late as Oct 15 (the due date after the extension). It's wise to be conservative on cash refunds and aggressive with your tax return filings.

Filing your tax return after April 15 may significantly reduce your chance of triggering one of the above stated IRS audit initiatives.

In our opinion there are many advantages and no disadvantages to using Extensions

The only possible disadvantage is delaying a refund.

For traders with large losses and carryback refunds (see Form 1045 above), we pointed out the risks of filing early. So, be patient and file in May or June.

You have more time to file and work out a better and more accurate tax return.

You can consider your current year trading activity and how that may affect your strategy for your tax return being filed. For example, if you start to generate large income in the current year, you might want to be more aggressive on the tax return being filed.

In our opinion, waiting lessens your chance of being audited by the IRS or your state tax authority. Many IRS examinations are selected before you file, and many IRS agents are reassigned for training or other duties after the tax-filing season crunch ends on April 15. Most sophisticated taxpayers and wealthy individuals always file close to the last possible day – after the extension is due Oct. 15th.

Read newspapers such as The Wall Street Journal around April 15. There will be stories about the many advantages of Extensions.

In this case, “the early bird gets the worm,” but you are the worm and the IRS is the bird. Patience is a virtue. That does not mean laziness, however, so get your numbers together and file an accurate extension.

Our extension filing strategies

Some Traders owe estimated taxes for the first quarter of the current tax year. With an Extension filing, you can skip the first quarter estimated tax payment and instead pay an extra amount with your Extension. When you file your tax return, you can apply the overpayment credit towards current year estimated taxes.

This strategy "kills two birds with one shot." You overpay your taxes for the year being filed, to give yourself a cushion against inaccurate estimates (or changing your mind about being aggressive on expense deductions or other tax-savings strategies) and you pay your current year first-quarter estimates. If it turns out you have very little or no credit towards the current tax year, then you just pay more estimated taxes for June 15th or Sept. 15th. Your tax return looks better showing a credit applied rather than a refund requested.

If MTM is not wise for you, we will discuss the situation with you and not include the MTM election with the extension.

The consequences of not filing an extension and filing a "late" tax return

You can read more about the types of penalties and how they are assessed on our "Can't Pay" web page.