Tax Day is nearly two weeks away. And if you’re reading this post, you probably haven’t filed your 1040 yet. Well, thank goodness for tax extensions. Actually, let me retract that last statement. It’s not a good idea to opt out for a tax extension because there probably will be a price to pay.
John Gregory, a tax practitioner and founder of 1040Return.com, which provides tax solutions for small business owners and individuals, suggests five things you should take into account if you plan to file a tax extension with the IRS.
No. 1 - The Purpose of the Extension. Filing a tax extension gives you a grace period of six months, which pushes your deadline to October 15. However, there is a catch. The IRS allows you the extension for the sole purpose of arranging for and organizing your documents. Do not assume that you are getting an extension for paying off you tax liabilities. You still have to pay at least 90 percent of your taxes by April 15. If you are trying to buy time to put off your tax payment for six months, it won’t be a wise thing to do. The IRS will charge interest on the unpaid tax obligation. This means, you will have to shell out more money.
No.2 - What if you are expecting a Refund? If you think you cannot catch up, you can go ahead and file an extension. However if you are expecting a refund on your tax return, you certainly do not need to request an extension. You won’t be penalized either for not filing your taxes, if you are expecting a refund. IRS’s only concern is the tax payers who owe them money. So if you are expecting a refund, you have three years to file your taxes and apply for a refund, after three years you will lose your right to the refund once and for all. For example, if you are entitled to refund on your tax returns for the year 2014, you must file your taxes before the tax season of 2017 comes to an end. After that you forgo your refunds.
No. 3 - What if You Owe Money to the IRS? If you happen to owe money to the IRS, you are supposed to file Form 4868. It allows you six months to file your taxes. But you do have to submit your extension request by April 15th. You can also file your tax extension electronically and pay the 90 percent of your tax liability online, directly from your savings/checking account.
- TC’s Tip: IRS.gov provides the forms right through its website. Here’s a link for you to download, fill out, and e-file your extension. A few lines down on the Form 4868, you’ll see that the IRS states that “you can get an automatic extension of time to file your tax return by filing Form 4868 electronically. You will receive an electronic acknowledgment once you complete the transaction. Keep it with your records. Do not mail in Form 4868 if you file electronically, unless you are making a payment with a check or money order.”
No. 4 - What If You Cannot Pay 90 Percent of Your Taxes? There could be a possibility that you apply for an extension but might not be able to pay the 90 percent of your tax liability by April 15th. In such a scenario Gregory of 1040Return.com noted that the best thing to do is pay whatever you can and request an installment agreement from the IRS. There are two aspects related to entering into an installment agreement; first is the fixed fee depending on the type of agreement and second is the interest applicable to the outstanding tax liability. The IRS charges $52 for a direct debit agreement and $120 for the standard or payroll agreement. Additionally, the IRS will charge you interest on your outstanding tax liability at the rate of 0.5 percent per month. You should note that even if you pay off 90 percent of your taxes by April 15, you will still be required to pay the interest on the remaining 10 percent of your tax liability. The same scenario could arise if you erroneously underestimate your tax liability.
No. 5 - Do not Forget to File for an Extension. If you have already ignored the deadline, do not fail to file your tax extension. It takes approximately one year for the IRS to realize that you did not pay your taxes. They will calculate your tax liability based on the information received from your employer, brokerage firms, banks and 1099 income, and calculate your tax liability based as a single individual with no dependents. To top it, they will add to it the applicable penalties and interest. The IRS doesn’t know of any deductions that you may claim and hence the tax bill certainly won’t be in your favor. And finally when you decide to file your tax return with a list of deductions, it is quite a possibility that you are setting yourself up for an audit.
Related stories: 6 Reasons to File Your Taxes Early
Have you filed your taxes already or do you plan on filing an extension? Leave your answers in the comment box below.