A TAXING TIME
Beware drawbacks if you file for extension
IF YOU’RE among the 8% of taxpayers who won’t be able to file their returns for whatever reason before the April 15 deadline, you can avoid getting on Uncle Sam’s bad side by filing an extension.
Just be aware that this option comes with several caveats. Here’s what you need to know: l What’s the purpose of an extension? Filing a tax extension gives you a grace period of six months, thereby pushing your deadline to Oct. 15.
But there’s a catch: The IRS allows you the extension for the sole purpose of getting your documents in order. Do not assume that you’re buying yourself six months’ time to put off your tax payment.
You still have to pay all or nearly all of your estimated tax bill by April 15 — at least 90% of it, to be precise — or else the IRS will continue to charge interest on the unpaid tax liability, and you end up losing more money. l How do I file an extension? If you owe money to the IRS, you need to file Form 4868. It allows you six months to file your taxes, though you do have to submit the form by April 15.
You can file an extension by snail mail or electronically, whether through the IRS official site, irs.gov, or tax information and assistance sites such as 1040Return.com.
You can also pay the 90% of your tax liability online, directly from your savings or checking account. After completing the process you can download a copy of the extension request that you just submitted. l Do I have to give a reason for an
extension? The IRS says you don’t have to explain why you’re asking for the extension. The agency will contact you only if an extension request is denied. l What if I can’t pay at
least 90%? In such a scenario, the best thing to do is pay whatever you can and request an installment agreement from the IRS. But there’s a fixed fee depending on the type of agreement as well as interest applicable to the outstanding tax liabilit y.
The IRS charges $52 for a direct debit agreement and $120 for the standard or payroll agreement. Additionally, the agency will charge you interest on your outstanding tax liability at the rate of 0.5% per month.
You should note that even if you pay off 90% of your taxes by April 15, you’re still required to pay the interest on the remaining 10% of your tax liability. The same situation could arise if you underestimate your tax liability. l What if I don’t file for an extension? You could end up paying a lot more than you would have had you bothered to file.
It barely takes a year for the IRS to discover that you did not pay your taxes. It will simply calculate your tax liability based on the information received from your employer, brokerage firms, banks and other income sources, and calculate your tax liability based on a single individual with no dependent s.
The IRS doesn’t know of any deductions that you may claim, and hence the tax bill certainly won’t be in your favor. To top it off, the agency will also add the applicable penalties and interest you owe.
Worse yet, when you finally decide to file your return with a list of deductions, there’s the possibility that you’re setting yourself up for an audit.
Gregory is a tax practitioner and founder of 1040Return.com