What is involved in filing an income tax extension?

1484275533 |

You are probably aware that you can file for an extension if you cannot complete your income tax return by the filing deadline. However, you probably aren't aware of everything involved in filing an extension.

First, the extension is an extension to FILE your tax return. It is NOT an extension to pay any tax due. Consequently, if your return is completed and you can't pay the balance due, filing an extension will not accomplish anything. If you don’t pay the amount due by the regular due date, you’ll owe interest. You may also be charged penalties. If you owe taxes and don't file your return or an extension, you'll owe a failure-to-file penalty. This penalty is usually 5% of the amount due for each month or part of a month your return is late. The maximum penalty is 25%. If your return is more than 60 days late, the minimum penalty is $205 (adjusted for inflation) or the balance of the tax due on your return, whichever is smaller. As you can see, if you cannot pay your taxes by the due date, you can save the failure-to-file penalty by either filing your return or filing an extension. If you file your return or an extension and do not pay your tax in full, you will owe a failure-to-pay penalty and interest. The late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by the tax return due date. It is charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%. The late payment penalty won’t be charged if at least 90% of the total tax on your return is paid on or before the regular due date of your return through withholding, estimated tax payments, or payments made with an extension (Form 4868).

Second, you must file an accurate extension. You want to come as close as possible to determining your actual tax liability so that you avoid the failure-to-pay penalty and interest (see above). In addition, if the IRS determines that your extension is not reasonable, they can declare the extension null and void which makes you liable for the failure-to-file penalty. Do not file an extension using zeroes for your estimate of total tax liability and/or total payments - if you do you there is a significant chance the IRS will declare your extension null and void.

As you can see, filing an extension is as involved as filing your tax return since you need to determine your tax liability as accurately as possible in order to avoid potential penalties and interest. Therefore, an extension should only be filed in cases where you do not have all of the information necessary to file a complete return.