Your tax extension deadline is looming

Know what you owe and what to do about it

If you’re one of the roughly 15 million taxpayers who asked the Internal Revenue Service for an extension on filing your federal taxes in April, time’s almost up.

The federal tax extension deadline hits Oct. 15.

By submitting Form 4868 as of April 15, you gave yourself an extra six months to file your taxes. If you miss the October deadline, you’re likely to face a hefty penalty for failing to file.

More than one in 10 taxpayers asked for an extension this year, according to IRS statistics. Typically, taxpayers who asked for one needed more time to gather tax documents, or they had complicated taxes that required additional prep work. On top of that, taxpayers are grappling with the ins- and- outs of the new tax code, which President Donald Trump signed into law in December 2017.

“There were a lot more extensions this year really due to the complexity of the Tax Cuts and Jobs Act,” the law that overhauled the tax code, says Bill Smith, managing director for CBIZ MHM’s National Tax Office.

He says, “In October, the key is to make sure you have your documents together. If you are missing anything, you will have to get the documents very quickly – you are running out of time.”

Tax extension date: What to know

Some taxpayers mistakenly believe the six- month extension provides an extra half- year to pay any taxes owed to the IRS, says Lisa Greene- Lewis, a CPA and tax expert with TurboTax.

“It’s a misconception, and we always emphasize that – it’s just an extension to file. The IRS wants you to pay 90% of what you owe” by April 15, she says.

Taxpayers who owe the IRS should have sent in an estimated payment before the regular tax deadline in the spring. If they didn’t – or low- balled what they owe the taxman – they could be on the hook for an underpayment penalty.

Underpayment penalties

If your tax return shows you didn’t pay at least 90% of your tax bill by April 15, the IRS will sock you with a penalty of 0.5% per month on the unpaid amount until the rate reaches 25%, Greene- Lewis says. It could take about four years to hit that limit – unless you’ve failed to file taxes, which carries a higher penalty. The IRS charges interest on the amount you owe.

Estimating correctly could be tricky for taxpayers who hadn’t gathered all their documents by the April deadline. Some tax preparers who wanted to help clients avoid the penalty may have overestimated what was owed by clients who filed extensions, Smith says.

“If you overpaid, you’ll get it back when we file the return,” he says. “That’s not the worst thing – the worst thing is there are people right now putting off filing or getting the info they need” to file before Oct. 15.

If you miss the Oct. 15 deadline

Taxpayers who don’t file by Oct. 15 can face even higher penalties, tax experts say. The IRS will sock you with a “failure to file” penalty of 5% a month on your unpaid tax bill for up to five months, maxing out at 25%. If you face penalties for both underpayment and failure to file, the IRS will charge the higher fee of 5% until that penalty hits 25% after five months, but Smith notes that the underpayment penalty will continue to run at 0.5% per month beyond that.

If you owe either penalty, the IRS will calculate your fine after you file your return, says Eric Bronnenkant, head of tax for financial services firm Betterment.

“Pay what you owe, and let the IRS send you a bill for the amount of interest and penalties that you owe,” Bronnenkant says.

Last- minute retirement savings

Some business owners and self- employed workers may still be able to sock away retirement savings for the 2018 tax year if they have a simplified employee pension individual retirement account, known as a SEP- IRA, tax experts say.

That’s because SEP- IRAs allow prioryear contributions as late as Oct. 15 – as long as an extension was filed.

If you qualify for a SEP- IRA but don’t have one, you “can set one up today and fund that contribution” before the October deadline, he says

Tax penalty relief

The IRS may waive penalties in certain cases. There’s also relief through the agency’s “first- time penalty abatement” program, CBIZ’s Smith says.

This program is open to taxpayers who haven’t paid penalties in the previous three years, among other criteria.