Fil­ing an ex­ten­sion doesn’t give you more time to pay tax bill

The Buffalo News - - BUSINESS - By Michelle Sin­gle­tary

WASH­ING­TON – Thank good­ness the tax code al­lows for pro­cras­ti­na­tion and the things in life that hap­pen, in­clud­ing events that are out of your con­trol.

You can achieve a re­prieve by fill­ing out IRS Form 4868: “Ap­pli­ca­tion for Au­to­matic Ex­ten­sion of Time to File U.S. In­di­vid­ual In­come Tax Re­turn.” The ex­ten­sion gives you six ex­tra months to file your re­turn.

Of course, there are a num­ber of rea­sons you might need more time, even though the tax dead­line falls around the same day ev­ery year – April 15. The due date might move a lit­tle for­ward if April 15 falls on a week­end, but you know for the most part your tax re­turn is due around that day.

The good thing is you don’t have to make up any ex­cuses or jus­tify why you will miss the tax dead­line.

“You don’t have to ex­plain why you’re ask­ing for the ex­ten­sion,” the IRS in­forms fil­ers in the in­struc­tions for Form 4868. “We’ll con­tact you only if your re­quest is de­nied.”

Nearly one in 10 tax­pay­ers files for an ex­ten­sion, and most of them now do it on­line, ac­cord­ing to Eric Smith, a spokesman for the IRS. “We are pro­ject­ing over 14.6 mil­lion ex­ten­sion re­quests this year,” he said.

So, what’s the No. 1 rea­son many peo­ple want an ex­ten­sion? “They are not pre­pared to pay,” said Deenice Gal­loway, a tax pro­fes­sional based in Mary­land. But then they get a shock. “No, the ex­ten­sion doesn’t give you more time to pay,” Gal­loway says she has to tell peo­ple. “It doesn’t stop the in­ter­est or the penalty. “

Al­though the IRS gives you more time to file your re­turn, you are still re­quired and ex­pected to pay any and all taxes that you owe by April 15.

Gal­loway said that, in her prac­tice, about 95 per­cent of tax­pay­ers who end up need­ing to file for an ex­ten­sion are un­aware that it doesn’t come with a post­pone­ment of what they owe.

“I rec­om­mend peo­ple make a pay­ment with their ex­ten­sion and ask for a pay­ment plan,” Gal­loway said.

Here’s the part of get­ting an ex­ten­sion that can seem per­plex­ing. Be­cause the ex­ten­sion doesn’t give you more time to pay, you have to es­ti­mate your tax li­a­bil­ity. But how do you know how much to pay if you haven’t fin­ished your tax re­turn?

“Ac­tu­ally, by look­ing at prior-year re­turns you can es­ti­mate how much you may owe,” Gal­loway said. “Even if you don’t have all your tax doc­u­ments, you can get a rough es­ti­mate by look­ing at your salary and ex­penses from the pre­vi­ous year. Gen­er­ally, if you owe one year, you owe the next.”

It may sound coun­ter­in­tu­itive or even scary, but even if you can’t pay, file your re­turn on time or ask for an ex­ten­sion.

“If your re­turn is done, there’s no rea­son to wait, even if you can’t pay,” Smith said. “Tax re­turns are not like wine. They don’t get bet­ter with age.”

By fil­ing a com­plete and ac­cu­rate re­turn by April 15, or send­ing an ex­ten­sion re­quest, you stop the late-fil­ing penalty.

“That’s 5 per­cent per month, and it builds up fast,” Smith said. “It’s also ten times the late-pay­ment penalty, which is, by com­par­i­son, just one-half of one per­cent per month.”

If you can’t pay your to­tal debt, pay as much as you can, be­cause it can help you qual­ify for “rea­son­able-cause re­lief” from the late-pay­ment penalty, Smith points out.

To qual­ify, you need to make sure you’ve paid at least 90 per­cent of what ends up as your to­tal tax li­a­bil­ity by the April dead­line. That 90 per­cent con­sists of with­hold­ing, es­ti­mated tax pay­ments and any amount you send with the ex­ten­sion.

Here’s an ex­am­ple of how the re­lief works, Smith said. Let’s say you asked for an ex­ten­sion and you filed your re­turn by the ex­tended Oct. 15 dead­line. Your to­tal tax li­a­bil­ity is $10,000. Through pay­check with­hold­ing, you paid $7,000. You sent $2,000 with your ex­ten­sion re­quest on April 15.

In all, you paid $9,000, which turns out to be 90 per­cent of what you owed. If you send the IRS the re­main­ing $1,000 due with your re­turn by Oct. 15, you won’t be charged the late-pay­ment penalty, Smith said.

How­ever, you’ll still owe in­ter­est, cur­rently fig­ured at the rate of 6 per­cent per year, com­pounded daily, but you’ll be ex­cused from the one-half of one per­cent late-pay­ment penalty, he said.

The tax code promotes pro­cras­ti­na­tion be­cause, de­spite a re­cent ma­jor over­haul, it’s still com­pli­cated and con­fus­ing. So, if you need more time for what­ever rea­son, take it. Just be sure to file for an ex­ten­sion, and keep in mind that Un­cle Sam still wants his money by April 15.

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