BY GREG MERMEL, C.P.A.
When
the next issue of PerformInk appears, the income tax deadline of April
15 will have just passed. My dog and I plan to spend most of the day dozing
in the sun. I can safely predict that some of you will spend most of the
day smacking yourselves in the head, saying, “What have I done?”
amid great moaning, gnashing of teeth and grand dramatic gestures.
So
what will these readers have done? One possibility is a sin of omission.
They just could not get it together to finish their income taxes, and
they let the deadline pass. They cannot turn back time, and they are now
officially Tax Delinquents. The other possibility is a sin of commission.
They slapped something together at the last minute and filed it, but it’s
not right. The math is bad, or they left something out, or they took the
independent contractor income and stuffed it in with the W-2s, or whatever
other way you might find to screw something up when you’re both
unsure of what you’re doing and in a panic.
Both
sins are pretty bad. You won’t burn in hell for either, but many
people think corresponding with the Internal Revenue Service (IRS) is
not much better. They are both easily avoidable.
Pulling
the Trigger
Not-quite-two
weeks can still be enough time to put it all together and file before
the deadline, if you start now. Make a list of the documents and information
you need, and start assembling them. Call your favorite tax professional
for an appointment if you are not planning to do your own. You need to
start right now, though, because you do not have much time to solve any
problems that arise. You may realize that you lost or never received a
W-2 and need a duplicate sent. Perhaps you sold some stock and don’t
remember when you bought it and what you paid for it, or, worse, you know
that your parents made the initial investment in this mutual fund for
you twenty years ago and dividends have been reinvested ever since. Your
tax professional might already have too large a backlog. Half your credit
card statements could be playing hide-and-seek, not to emerge till June.
Regardless
of whether you try and fail to complete it before April 15, or just decide
to watch the Cubs’ spring training games instead, you shouldn’t
and needn’t commit either sin. The IRS will grant a four-month extension
of time to file your return. All you have to do is ask them; it’s
entirely automatic. You don’t have to give a reason or even sign
the form 4868, and you can do it by phone if you filed a return last year
and are not making a payment. Call 888/796-1074 and follow the prompts.
Why
Are They Being So Generous?
You
may well wonder why a government agency not usually noted for is friendliness
and generosity is being so nice about extensions. The answer is money.
The
automatic extension gives you more time to file the return, but it does
not give you more time to pay the taxes. One is supposed to make a good-faith
effort to estimate the taxes you will owe, and to pay those with the extension
request. For those of you who find yourselves missing only one or two
bits of data, you or your tax professional can come up with a pretty good
estimate. If you watched baseball instead of working on your taxes, you
will have to pay interest along with a penalty for late payment, which
is really just more interest under a different name.
If
the IRS were a person, and you could catch it in a mellow mood, late at
night, after a good bottle of wine, it would tell you that it has a win-win
situation. Those who pay after April 15 are charged penalty and interest
from that date till the taxes are paid. But if the IRS owes you money
they do not have to pay interest so long as they send it within 45 days
of April 15 or when you file the return, whichever is later. Further,
they pay that interest to taxpayers at a lower rate than they charge late-paying
taxpayers.
My
experience suggests that human factors amplify the effect of this asymmetry
in the government’s favor. Fearfulness often leads those who do
make payments with their extensions to overestimate the bill, resulting
in an interest-free loan to the government. And those so paralyzed by
fear they do nothing except somehow file an extension also tend to have
refunds coming.
Me
Too!
Don’t
ignore the states when you think about extensions. The IRS may be ominous,
but many states are insidious, with proportionately much higher penalties
and interest for those who do not pay by the deadline. Indeed, I often
counsel clients who cannot pay all of their taxes on time to pay the states
first.
Illinois
and most other states will grant an automatic extension for filing their
tax returns if you have a federal extension. This makes perfect sense,
because the starting point of almost every state income tax calculation
is a figure from the federal return, “adjusted gross income.”
Extension forms for these states are nothing more than a voucher identifying
who is paying how much for what tax year, similar to those used for quarterly
estimated tax payments. Ten others, for reasons best known to their legislatures,
require that you file a separate extension request with them. Eight—Alaska,
Connecticut, District of Columbia, Massachusetts, North Carolina and Virginia—require
their own forms. Hawaii and New York will accept either their own forms
or a copy of the federal form.
We’ve
Still Got Them.
My
“Checklist of Potentially Deductible Items” for those in the
performing arts could be useful in May (or August) when you try to finish
up. Just call, write or e-mail me, and we’ll be happy to send one
out to you.
Are
there money or tax questions you would like to see discussed in this column?
Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call
773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail
greg@gregmermel.com.
Greg
Mermel is a certified public accountant whose clients in the arts range
from individual performers to major theatre companies and suppliers. He
also has been known to produce theatre.