Despite best efforts, sometimes filing a tax return extension is unavoidable. DMJ can assist with the filing process, but it is important to be prepared for decision making and action steps along the way. A review of the rules that apply at both the Federal and North Carolina state levels for filing an extension on individual (1040) tax returns will prove beneficial.
The federal extension is filed on Form 4868. Interest is due on all tax not paid by April 18 (2017 deadline for the 2016 tax year), regardless of the status of any extension. There are two penalties that particularly apply to extensions. The first penalty that can apply is the late payment penalty. This is calculated as 1/2 of 1% per month of the tax not paid by April 18 for a maximum of 25%. The penalty is not charged if the taxpayer has reasonable cause for paying late. You are considered to have reasonable cause if at least 90% of your actual 2016 tax is paid by April 18. The second penalty that can apply is the late filing penalty. This is 5% for each month the return is late, for a maximum of 25%. Obviously, this penalty is the more serious of the two because of its magnitude.
On Form 4868, you need to provide your projected tax liability, a reasonable calculation of the amount of tax you owe, regardless of whether or not you pay the tax due with the extension. We recommend you pay as much as possible with the extension to minimize the interest and penalties. A word of caution – if the IRS determines that your projected tax liability has intentionally not been an accurate assessment of taxes due, this could make you subject to the late filing penalty.
When addressing extensions at the state level, the focus will be on the rules for filing North Carolina’s Form D-410 for individual tax return extensions. North Carolina does not follow the federal rules for filing an extension. Most importantly, a North Carolina filed extension requires full payment. North Carolina will assess a late payment penalty of 10%, with a minimum of $5.00 if 90% of the final tax assessment is not paid by April 18. The late filing penalty is 5% per month for a maximum of 25% for invalid extensions and interest is assessed on balances paid after the due date.
Additional filing deadlines and extension rules to keep in mind are:
- Partnership tax returns now have a Federal filing deadline of March 15 but have an April 18 deadline for North Carolina and many other states.
- Trust tax returns are due on April 18 for the 2016 tax year.
- Gift tax returns are due on April 18 for the 2016 tax year.
- New for the 2016 tax filings, form 114 which reports foreign bank and investment accounts, is due April 18. An automatic 6-month extension is available.
- Most NC personal property tax listings (including Guilford, Forsyth, and Alamance
counties) can be extended until April 15. Some counties have even earlier due dates.
- Eligible LLCs must file their NC Annual Report with the $200 fee with the NC Secretary of State by April 15.