What happens when the April tax deadline is rapidly approaching but you still haven’t been able to get your tax return ready to file? Well, there’s some good news. You can actually file for an extension. Under the right circumstances, a tax extension is a useful tool that can be used to help your financial situation and relieve some stress of a missed deadline, but if details are missed or handled incorrectly, this useful tool can prove costly.
Tax Extension Basics
All U.S. taxpayers are eligible to receive a six month extension of the filing of their taxes, pushing the due date from April 15 to October 15 (or next business day if these dates fall on a weekend or holiday). The effect of this filing is that the IRS will permit you to delay the filing of your tax return for this additional period of time in order to collect additional information, to locate missing documentation, or because you simply put it off for too long. The purpose of this tool is to allow you more time to collect the information needed to file a complete and accurate return.
The key point here is that it grants you additional time to file your return, not pay your taxes. This is the biggest misconception people have about tax extensions. They usually assume that if you file an extension you also don’t have to pay any taxes, if you owe, until the extension deadline. Unfortunately, that’s not what an extension does.
Filing the Extension
The paperwork required by the IRS to receive a tax extension is called Form 4868. It asks for some basic information and is as short as a single page. In the majority of cases, this is the only documentation required. If the form is completed correctly and on time, the extension should be granted.
Form 4868 is available is a wide variety of formats and from a wide variety of sources. In fact, if you prepare your taxes with the help of software such as TurboTax you’ll have an option to print and file the extension form. Once it has been completed, the software will provide directions on how the form can be filed electronically right through the software.
For individuals who do not use tax preparation software but wish to file their extension electronically, the IRS website provides a series of electronically available forms. These can be filed out online and filed directly. The advantage of using tax preparation software to those who intend to file this way is that the information is then integrated in one’s overall return. There is no distinction on the part of the IRS.
Individuals who use a tax preparer can simply request that they use file the extension. In most cases this will be done electronically, but no further action will be required by the individual. The final approach one can use is to file with a paper Form 4868. The form is available to be printed online, as well as through multiple sources of paper tax documents. The post office, for example, will have complete sets of tax forms; these packets will include Form 4868. Once the form is obtained, it can be filled out and mailed to the IRS.
The Ramifications of a Tax Extension
Filing a tax extension gives the taxpayer longer to collect pertinent information and file a complete and accurate return. It also allows a taxpayer to avoid be assessed a “Failure to File” penalty, which can be significant. But keep in mind that a tax extension gives one longer to file, not longer to pay. At the time a tax extension is filed, the IRS expects the taxpayer to make an estimate of the amount of tax that will be owed and to pay that amount. Interest charges will begin to accrue immediately following the regular tax deadline, so making a payment at the time the extension is filed is important to avoid additional costs.
These penalties can add up. There are two basic penalties the IRS typically imposes: a late filing penalty of 5 percent per month on any tax due plus a late payment penalty of half a percent per month. If you file an extension and then file by the extended deadline you’ll avoid the hefty 5 percent per month penalty. But if you don’t make an estimated tax payment by the April deadline you will still be assessed the half a percent per month penalty.
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Filed Under: Taxes
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.