This is part two of an interview with H. A. Beasley, founder and director of H.A. Beasley & Company, PC, an accounting firm in Murfreesboro, Tennessee and ICS Law Group, PC. To listen to the the interview, visit this YouTube link .
Question: So, is it fair to say that the biggest problem that a business owner faces with filing their taxes on time is due to their lack of focus? Is that the most common problem?
H.A. Beasley: I think any aspect of compliance with the government is an issue for a first time business owner or a small business operator whether it is taxes or some other aspect of regulation. Most entrepreneurs are good at the business part of what they do. They don’t know where to start when it comes to addressing the necessary aspects of filing with tax laws.
Question: So if they don’t comply or if they are late, what are some of the consequences that occur?
H.A.: Well you know that is one of the interesting things; there are a lot of popular misconceptions about income tax compliance. Just talking for a minute solely about federal taxes, the late filing aspect of non-compliance is more expensive that late payment today.
For example let’s say I owe $50,000 worth of taxes because I have had a great year of business. Say that April 15th rolls around and I don’t file my federal tax extension paperwork or my federal return. I don’t send any money, I don’t do anything. The most expensive aspect of that is the fact that I didn’t file an extension for a return. The IRS will begin immediately assessing 5% a month up to 25% in 5 months, from that $50,000 of tax that I owe, and that will become $62,500, just because I didn’t send in some paperwork.
Meanwhile the penalty for not paying taxes is dramatically less than that. It is a lot like working with a finance company, for the interest of penalties for not paying.
If we can help our clients to get used to the idea that they have got to file the paperwork, and if they can’t pay it immediately it is like dealing with any other creditor. We have got to be good with our paperwork and do what the creditor requires so that we can either get a payment plan or demonstrate that we aren’t presently able to pay.
We’ve found the IRS is very willing and able to work with people that are very good at communicating with them. The biggest penalty, to summarize, is they get people for not doing the paperwork. It may take a business to get on his feet; once he gets behind on his taxes it may take 2 or 3 years to pay those taxes. It would be relatively inexpensive to be late on payment so long as he has not failed to file all the required filing within the extended few days.
Question: How does the extension process work with the IRS?
H.A.: IRS Extensions are “automatic.” Individual taxpayers are entitled to get one automatic extension that is good until October 15th. My understanding is that technically the IRS can challenge an extension with a tax is not fully paid but in my practice, I’ve never had them do that, that I can recall. So, an extension with the IRS does not require payment to be valid.
So in my prior example of the guy who owed $50,000, if he’s our client we’re going to send the extension off on April 14th whether we know how much he owes or not. We’re going to get that extension ready and send it registered or certified or otherwise well known to the IRS that he’s filed his extension on time. That gives him the initial six months not only to determine how much tax he owes if he doesn’t know. But if the IRS doesn’t know how much he owes, they really can’t begin the collections process.
Filing an extension is also important because oftentimes for business owners that have had a great year and he would like to contribute to, lets say, a SEP IRA plan or some retirement program like that. SEP’s are one of the plans where, so long as you have filed valid extensions, you can make a contribution later…so…You can actually do after a year end tax planning with proper use of the extension.
Let me add that for Tennessee residents, Tennessee is a little more narrow-minded when it comes to the extension process. We’ve found that in order to get an approved extension you’ve got to pay the appropriate payment along with the extension. That puts a great deal more pressure on taxpayers, especially business owners.
Stay tuned for next Thursday as we share Part Three of the interview with H.A. Beasley.