Federal income taxes aren’t due until April 15, but as the day creeps up and you may need more time, think about filing an extension, which gives you an extra six months to file your federal tax return, until Oct. 15.
Why file an extension?
“If you don’t have all your paperwork, you file an extension,” says Wendy Barlin, a Los Angeles-based certified public accountant and author of That’s Deductible!: Simple Tips and Tricks to Find More Business Tax Deductions.
Oftentimes people with investments have not received all their tax documents by April 15, such as those receiving a Schedule K-1, which reflects income from partnerships. Or you may be unable to take the time to gather your documents and properly prepare and review the returns before the deadline, says Bernadette Schopfer, CPA and director of taxation for Maier Markey & Justic LLP in White Plains, New York.
Filing an extension also allows you to avoid paying a late filing penalty, which is 5 percent a month of any tax monies owed, up to 25 percent, Schopfer adds.
However, filing an extension does not give you extra time to pay your taxes without a penalty of .5 percent per month of what is due, says Barlin: “You have to pay 100 percent of your tax due by April 15th even if you’re on extension. And that’s what a lot of people don’t understand.”
But how do you know how much you owe if documents are missing?
“Either prepare a draft return with what you think your numbers will be and pay that,” says Barlin, “or in order to avoid penalty, the IRS requires that you pay 110 percent of what you paid in the prior year.”
If you don’t have the money to pay what you owe, “at least get the extension,” says Schopfer. You will be paying a late payment penalty of a half percent a month as opposed to the 5-percent a month penalty plus the interest for not filing the extension.
“The big thing is, I think people who owe money do nothing, and that makes matters worse,” Schopfer says. “Get the extension. Why incur what could be a 25 percent penalty when all you have to do is file an extension?”
While you can’t get an installment payment agreement with the IRS until the tax return is filed, you can always send in money to the IRS between requesting an extension and filing the return in order to cut down on the interest and penalties that are accruing while the tax is outstanding, she adds.
If you owe a lot of money but send in the extension saying you owe zero, the IRS can invalidate the extension. “I think people don’t understand,” says Schopfer. “At least estimate what it is.”
How to file for an extension? The simple process requires sending in IRS Form 4868 in the mail. And you don’t have to tell the IRS why you need an extension. You can also submit the form electronically using tax preparation software.
Alternatively, on the IRS website, an extension will automatically be filed for you once you make an extension payment using the IRS Direct Pay system.
According to the IRS website, “use IRS Direct Pay to make a full or partial payment on your taxes in order to receive an extension without having to file Form 4868.”
The deadline for filing an extension is midnight April 15, the same as the deadline for filing a tax return.
What about filing state taxes? A federal tax extension does not automatically cover your state tax due, so contact your state tax agency to find out the requirements.
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