How to File a Business Tax Extension With The IRS

In 2006, the United States Internal Revenue Service amended its policy to simplify the extension filing procedures for businesses seeking to file after the formal tax filing deadline for annual tax forms (irs.gov). The extension allows businesses to postpone formal filing for up to 6 months from the last possible filing date for businesses.

To qualify for an extension of filing, all a business need do is complete an IRS form 7004. IRS form 7004 is not the only type of extension form, as tax payments deferral requires additional documentation, such as via IRS form 1138. Furthermore, in regard to employee retirement plan reporting, a separate IRS form 5558 is required for extension up to 2.5 months.

• Form 7004: Extension for filing tax documentation with the IRS 

• Form 1138: Extension for business payment of taxes 

• Form 5558: Extension for filing employee plan distributions

Filed IRS Forms 7004 grant either 5 month or 6 month filing extensions, depending on the type of business. Partnerships, Estates and Trusts may only qualify for the 5 month extension, while a host of other business types may qualify for the 6 month extension. When filing for an extension, the only completed form that needs to be sent to the Internal Revenue Service is the form 7004. According to the IRS, taxes due from a business, and/or interest on tax due is still incurred, whether it be retroactively or otherwise, regardless of the tax filing extension. As stated above, the payment of said taxes may be deferred by using IRS form 1138.

Steps for filing an extension with the IRS

To illustrate how a business would go about filing for an extension with the IRS, the following steps may be helpful. Since tax filing involves a lot of financial records, obtaining quarterly reports, financial statements, and tax deductions such as contributions to retirement plans and other tax deductible items, an extension may be required to properly gather, record and submit tax documentation. On IRS form 7004, no reason is needed for filing the extension. The services of an accountant, tax specialist or tax attorney may be beneficial in some situations.

Step 1: Gather relevant tax documents, ex-financial statements, withholdings, and retirement plan contributions

Step 2: Place all pertinent documentation and forms into a folder and/or computer file for later use

Step 3: Identify business structure: ex-sole proprietorship, C-Corporation, LLC etc.

Step 4: Acquire and complete IRS form 7004, then mail to appropriate IRS tax service center.

Step 5: Calculate probable tax due and/or potential interest payments on the deferred tax filing.

Step 6: Submit form 7004 and/or any other necessary tax filing extension forms. Send payments and any relevant payment deferral forms to the IRS.

Since companies often have different tax situations, bookkeeping systems and other financial recordkeeping, it is important to identify what can be deducted from company income to ensure the business doesn't overpay taxes. Doing so may take time, hence the need for the extension. Tax filing extensions may be needed for a number of purposes.

Summary

Filing for a business tax filing extension with the United States Internal Revenue Service is fairly simple in comparison to the actual filing of annual tax documents. Essentially, all that is needed is a form 7004, however, depending on the businesses situation, other forms may also be needed such as forms 1138 and 5558. When in doubt, contacting the U.S. Internal Revenue Service businesses or corporate division may be helpful. 

IRS tax centers are located throughout the country and can be located through the linked map. Additional assistance from tax specialists, tax accountants and/or attorneys may be necessary in some situations. Keeping paperwork, financial records and bookkeeping systems organized can be helpful in the time following an extension as ultimately, tax filing should be accurately reported. This article has illustrated ways businesses can file for tax filing extension with the U.S. Internal Revenue Service by pointing out paperwork requirements, in addition to steps that may be involved when filing for extension.

Sources:

1. http://www.irs.gov/newsroom/article/0,id=154554,00.html
2. http://www.irs.gov/pub/irs-pdf/f1138.pdf http://www.irs.gov/pub/irs-pdf/f5558.pdf
3. http://www.irs.gov/pub/irs-pdf/f7004.pdf
4. http://www.irs.gov/pub/irs-pdf/i7004.pdf
5. http://www.irs.gov/formspubs/article/0,id=98155,00.html

A guide to the different types of income tax

Income is categorized into approximately 24 types according to the Internal Revenue Service (IRS). Although there are several different types of income, they all can be labeled as taxable income. However, not all kinds of income are taxable at the same rate. Tax rates can also change between tax years due to changes in tax law that can affect how tax is calculated, when tax is calculated and what is or isn’t tax protected.

• Wages and salaries

A common type of taxable income described by the IRS is wages and salaries. This income is reported on the Form W2 that is sent to income recipients near the beginning of tax filing season. Even though this is one type of income, it is taxed at differing rates determined by total taxable income; for the 2010 tax year, these tax rates can range from around 10 percent to 39 percent. Total wages and salaries is not usually the final amount of income that is considered taxable because it doesn’t take into account exemptions, deductions and credits.

• Capital gains

Tax on capital gains varies on whether those capital gains are offset by capital losses and if the capital gains are acquired through a tax protected financial vehicle such as  a Roth IRA. According to the Tax Foundation, the maximum capital gains tax for the 2010 tax year is 35 percent. This amount applies only to short-term capital gains and not long-term capital gains which have a 15 percent maximum rate for the same year.

• Interest and dividends

People also often receive Form 1099s that provide a record of other income such as income from interest and dividends. Tax on dividends can vary and may not be taxable at the same rate as normal income. These types of dividends are called qualified dividends and must meet certain requirements to qualify for the lower tax rate. These qualifications can be reviewed at the University of Connecticut Business School. Interest on financial securities is often taxable unless those financial instruments are non-taxable as is the case with some types of municipal bonds.

• Social Security

Income from Social Security entitlements may or may not be taxable depending on the individual circumstances. The IRS states persons whose only income for a given tax year is social security may not even need to file a tax return. Income from social security is recorded on Form SSA-1099 and is reported on Form 1040. If social security is taxable, it is usually taxed at the same rate as income from wages and salaries or the standard tax rate that applies to the given taxable income amount.

• Retirement income

If income is received from retirement accounts such as Individual Retirement Accounts (IRAs),and 401(k)s, whether or not that income is taxable can also depend on the individual situation. For example, if the income is directly transferred to another retirement plan, i.e. not received but redirected there’s a good chance it may not be taxable. However, if the income is paid to the retiree, and is from a tax deferred retirement account such as a traditional IRA, then the income is more likely to be taxable.

Several additional types of income tax exist and it is always a good idea to verify tax questions and information with the IRS at 1-800-829-1040, or a qualified tax professional before sending a completed tax forms to the IRS for processing. This is because there may be overlooked tax rules, better ways to reduce tax and possible errors in the tax documents to be sent to the IRS.

The Best 5 Tax Books for Tax Payers

The five best tax books for taxpayers cover up to date, and pertinent tax concepts while also providing insight and useful knowledge regarding tax filing, planning and strategy. No one tax book may provide all the information a taxpayer needs in their quest for tax answers, however the five best tax books for taxpayers do individually and collectively cover a vast amount of tax information ranging from basic income assessment to taxation of mixed personal and business expenditures.

It is also important to realize tax laws can change often and that the tax code from one year may not apply in its entirety to tax filing in current years. For this reason, it is a good idea to double check the application of tax concepts from these books with the Internal Revenue Service or a tax professional. International Standard Book Numbers (ISBN) can vary by edition and version of tax books for the same tax year. The following five tax books are considered the best because of their professional, knowledge based and informative approaches to tax matters.

"Federal Income Taxation,11th Edition"
Marvin A. Chirelstein
Foundation Press, Thomson West
New York, New York 2009
ISBN 978-1-599-41403-4

An excellent resource on in depth tax concepts and principles, "Federal Income Taxation" covers a wide range of individual income tax issues such as recovery of capital investment, cancellation of indebtedness, extensive deduction, attribution of income, and more. This is one of the five best tax books for taxpayers because it is well rated by readers, comprehensive and updated often.

"Federal Income Tax: Examples and Explanations 5th edition"
Joseph Bankman, T.D. Griffith and Katherine Pratt
Aspen Publishers
New York, New York 2008
ISBN: 978-0-735-56533-3

This book is written by three law professors from Stanford, University of Southern California and Loyola law schools. There are multiple editions of this book and topics include timing, deductions, income shifting and capital gains and losses.  This book is intended as a student textbook that follows a question and answer approach to tax concepts. Details about 'Federal Income Tax: Examples and Explanations' can be found at the Aspen publishers website.

"1040 Forms and Instructions"
Internal Revenue Service (IRS)
U.S. Department of the Treasury
http://www.irs.gov

The 1040 Form and Instructions book provides guidelines for a number of forms, schedules, requirements and worksheet requirements for individual tax filers. This book is usually published and available for free to tax payers on an annual basis. For tax payers planning on using multiple forms and schedules, this book is a useful resource and guide. A copy of the 2009 1040 Forms and Instructions is available for free online.

"Americas Best Tax Strategies"
Stephen D. Kirkland
Xlibris Corporation
ISBN 1-4134-6978-7

For a more toned down, less formal and easier to understand approach to understanding personal income taxes while also learning about tax planning and techniques, 'Americas Best Tax Strategies: Legitimate Ways to Save Income Taxes Now' is a good choice. This book is one of the five best tax books for taxpayers because a large part of it is dedicated to explaining tax strategies. The 2004 edition of this tax book is available on Google books for free.

"Federal Taxation: Individual Income Taxes"
William Hoffman, James E. Smith and Eugene Willis
Thompson SouthWestern
Mason, Ohio 2010, 2011
ISBN: 978-0-538-78624-9

A new edition of this book has been released every tax year for several years and this book is available digitally, in hardcover and paperback. Older, paper back and digital editions are usually less expensive especially when purchased used. Older versions provide much of the same information excluding recent updates. The 2008 version of this book is also available for free on Google Books.

If the above five books for tax payers aren't the best in your mind consider reading Title 26 of the U.S. Code. Title 26 contains the codified statutory tax law and constitutes a primary source of legislative tax requirements for cross referencing and additional information. The Internal Revenue Service also provides extensive information on tax code, tax regulations and guidance which may be helpful when filling in tax information blanks and confirming the validity of tax strategies.

Taxes on Life Insurance Death Benefits

Lump sum payments from life insurance payments, payable upon death are not taxable so long as they do not exceed the present value of the policy. For example, if person X holds a life insurance with beneficiary Y listed to receive $100,000.00 in the event of death before a certain age and under certain circumstances only, then the present value of the policy is $100,000.000 and will be not taxable. However, any cash value the policy has accumulated will be surrendered in the event of a face value payout.

There are instances in which life insurance death benefits are taxable. Specifically in cases of 1) interest earned and 2) estate taxation benefits. Since payout of insurance death benefits may be received in installments, additional interest may accumulate on the value retained by the life insurance company. Additionally, in the case of estate taxation, the death benefits are not taxable as income ,but rather as estate taxes.

Taxation of interest on death benefits

Any amount of interest earned and paid out to the life insurance beneficiary that is over and above the face value of the insurance policy is taxable as income. Depending on how that interest is accumulated i.e. through which financial instruments can have an influence on the taxation levels of the additional income. For example, if the interest is earned through ownership of company stock that pays qualified dividends, that interest may be taxed at either 5% or 15% depending on the income level of the recipient. Or the interest may not be paid out, in which case it could be classified as tax deferred income.

Estate taxation on benefits

If an insured person dies an the face value of the insurance death benefits are less than $1-$3.5 million depending on the year, no estate taxes may be payable. However, if there are other assets in the estate, any amount over the tax exempt amount may be taxable.

When an insurance holder passes away, an Estate tax return may have to be filed prior to the nearest following tax filing deadline. Specifically, an IRS form 706 Schedule D may be needed to be filled out along with the other required information of the form 706.

In some cases, estate taxation may be avoided through the use of specific trusts such as an AB Trust, QTIP trust or Life Insurance trust. In the case of a life insurance trust, life insurance proceeds may be withdrawn without estate taxation and in the case of an AB trust, the value of the state is divided making the total estate value lower for the surviving relatives and hence less likely to be taxable under estate regulations.

Multiple insurance policy death benefits and additional tax tips 

In some cases there may be a number of insurance policies in existence including but not limited to auto insurance, employer insurance, and one or more types of life insurance. In such cases, the amount of the total proceeds may exceed the tax exempt estate limit, making any amount above that limit potentially taxable. To limit taxation in such instances as above, it may be advantageous to utilize one or more of the following techniques:

• Establish Trusts: i.e. charitable, AB, or life insurance, credit
• Hold assets in a family owned business
• Life insurance benefits may be payable into a shared annuity insurance policy, in which case the payments are distributed as an annuity  and avoid estate tax and/or are tax deferred income.
• Charitable contributions up to $12,000 per beneficiary may lower the estate value enough to be non taxable.
• Consult an attorney practiced in Estate law
• Seek the advice of a licensed Tax Accountant
• Contact the Internal Revenue Service for answers to additional questions.
• Research applicable laws, tax code, forms and methods of taxation.

Summary

Taxes on life insurance death benefits are for the most part payable through estate taxation, rather than income taxation except in cases of interest income on deferred payments. Additionally, if the total face value of death payout insurance is less than the pre-determined estate tax minimum taxable amount, then the death payout may not be taxable assuming no other income that causes the estate value to rise above the taxable minimum is realized through the estate. It may be possible more than one insurance benefit becomes payable in which case the use of trusts such as Life insurance trusts may be beneficial from a tax perspective.

Sources:

1. http://www.irs.gov/publications/p525/ar02.html#d0e5141
2. http://www.irs.gov/pub/irs-pdf/f706.pdf
3. http://www.ins.state.ny.us/que_top10/que_life_who.htm
4. http://www.irs.gov/businesses/small/article/0,id=108143,00.html
5. http://www.nolo.com/article.cfm/ObjectID/DAC2BB31-35E4-43B2-9BDFA70AD3775418/
6. http://law.freeadvice.com/estate_planning/asset_protection/techniques_estate_taxes.htm

How Does Filing Bankruptcy Affect IRS Tax Debt

Filing for bankruptcy may or may not affect Internal Revenue Service (IRS) debt depending on 1) the type of bankruptcy, 2) judicial decisions, 3) IRS regulations and 4) Documentation filed with the IRS by the individual or persons filing for bankruptcy.

There is no one answer for how bankruptcy affects taxes because there are multiple situations and rules that affect money owed. In light of this, a methodology for assessing tax due to IRS is discussed hereafter. Numerous factors can affect whether or not, and how much tax a bankruptcy petition filer may owe in taxes. Some of these factors are listed below:

• Ability to repay as assessed by the IRS
• Formal discharge of tax debt by bankruptcy court
• Compliance with tax code and bankruptcy regulations
• Taxable bankruptcy exempt assets owned by the filer
• Carrying out of tax and bankruptcy related filings

Direct tax benefits of filing for bankruptcy

Bankruptcy can affect IRS debt by legally demonstrating the inability to pay taxes. This inability to pay taxes can be determined by both the bankruptcy court and the Internal Revenue Service.

Filing for bankruptcy can also affect IRS debt by reducing the total amount of assets one owns that can be used for the purpose of paying taxes depending on the priority of debt in order of repayment.

Since bankruptcy is a second chance financially, taxes that do not enable this second chance in principle may be exempt from repayment. Some of the ways filing for bankruptcy may affect IRS debt are as follows:

• May redistribute payment obligations
• Taxes due can be negotiated with the IRS
• May reduce taxable value of personal assets
• Can limit tax liens and back taxes due

Bankruptcy tax assessment methodology

Since the purpose of bankruptcy is to reduce or make debt manageable, taxes due to the IRS are no exception. For this reason, realistically, factually and thoroughly approaching the question of how filing for bankruptcy affects IRS tax debt may involve a number of techniques, and/or methodologies. An example methodology is provided below.

1. Determine type of bankruptcy and if judicial rule will override IRS regulation
2. Identify assets not included in the bankruptcy which taxes may be due against
3. Consult with the IRS bankruptcy division, and bankruptcy lawyer
4. File an ‘offer in compromise’, IRS Form and other required documents

IRS tax forms used in relation to bankruptcy

Extensive documentation is often required for bankruptcy filing as debtors, the bankruptcy court, and the IRS should all be made aware of the financial scenario the party filing for bankruptcy faces in order to determine, and asses payment or non-repayment of debt obligations. In terms of IRS debt, some of the forms and information used during bankruptcy proceedings include those mentioned below:

• IRS Form 656-Offer in compromise
• IRS Form 1040 (and related documents)
• Internal Revenue Bulletin (IRB) 2006-40
• IRS Publication 538: Offer in compromise information
• Information pertaining to reduced tax year filing during bankruptcy
• IRS Publication 908: Bankruptcy tax guide
• Bankruptcy Abuse Prevention And Consumer Protection Act of 2005: BAPCPA ACT: Title VII

Bankruptcy filing tips

Filing for bankruptcy involves bankruptcy law, US Statutory law and dynamic individual financial situations. For this reason not seeking professional assistance is generally not a good idea. There are many legal requirements, options and stipulations that if not abided by, may disqualify, hamper or reduce the potential tax advantages of filing for bankruptcy. Hence, the following tips are not guaranteed to be completely accurate due to the complexity of tax law, and are just a few of the several things to consider when dealing with taxes due to the IRS when filing for bankruptcy.

• File taxes regardless of bankruptcy. Not doing so can complicate or disqualify the bankruptcy.

• For a chapter 7 bankruptcy, File an IRS Form 1040 shortly after the bankruptcy case begins. This can minimize the amount of tax due under Section 1398 of Title 26 of the US Code. IRS Publication 538 has more information on this.

• Utilize all legal bankruptcy related tax deductions, reduction techniques and options to minimize non-qualifying tax debt. For example deduct bankruptcy lawyer fees in Schedule A of bankruptcy tax year.

• Signing over of real estate that had equity value prior to bankruptcy filing to an offshore trust may protect the equity in the property from tax liens if in compliance with U.S. Code statutory law.

• Some taxes from tax years prior to filing for bankruptcy may still be claimed by the IRS

• For unanswered questions or concerns contact the IRS Taxpayer Advocate Service at 1-877-777-4778 and/or speak with a qualified tax professional.

Sources consulted:

1. http://www.moranlaw.net/taxfaq.htm (Moran Law Firm)
2. http://www.irs.gov/pub/irs-pdf/p908.pdf (Internal Revenue Service)
3. http://www.mckenzielaw.com/BANKRUPT.html (Mckenzie law firm)