Extension Vital to Avoid Penalties

Good news! The traditional April 15th income tax deadline falls on a Washington, D.C. holiday this year making April 18th the deadline to file your taxes.  The bad news - April 18th continues its advance regardless of this three day reprieve.  For those who have not yet filed their taxes the deadline brings a variety of responses.  Many taxpayers panic and quickly rake together receipts and tax documents to join the like-minded at the office of their tax professional (who tells them they will have to file an extension).  Others anticipate a refund and simply let the date pass by without nearly a glance (or an extension).  And still another group, those who owe more taxes than they can afford, avoid the issue entirely.  These taxpayers darken the date, pull the shades, and hope that IRS’s shadow will drift by their window.

Filing an extension is very important.  Today I’ll discuss the different ways to file an extension, the importance of filing an extension, and how to file an extension that will withstand IRS scrutiny.

An extension for filing a personal income tax return gives taxpayers an additional six months (until October 17, 2011) to file a personal tax return that will be considered timely.  This extension is obtained by completing and delivering form 4868 “Application for Automatic Extension to File U.S. Individual Income Tax Return before April 18th.

There are three ways to file an extension:

1. Complete a paper form 4868 and mail it to the address listed on the form’s instructions,
2. File an extension electronically through your tax professional or through the e-file section of the IRS website (a bit more complex than it may seem), or
3. Obtain an extension by making an estimated payment by using a debit or credit card.  For more information please visit http://www.irs.gov/e-pay.

Filing an extension provides an additional six months to timely file an income tax return.  It does not allow more time to pay your taxes, which are due by April 18th.  If you believe you will owe taxes for 2010, filing an extension is vital to avoiding substantial penalties and interest.  Two tiers of penalties are calculated when income taxes are not paid by the due date.  The first penalty is the Late Payment Penalty.  The late payment penalty is equal to ½ of 1% of taxes due per month (or any part of a month) that tax remains unpaid up to 25% of the unpaid balance.  If, for example, you owe $1,000 in taxes on April 18th and file an extension a late payment penalty of $5 per month will be assessed each month your taxes remain unpaid.  If you pay in October you will owe $1,030 to the IRS (plus interest).

The second penalty is the Late Filing Penalty.  The late filing penalty is ten times the late payment penalty: 5% of taxes due per month up to 25% of the unpaid balance.  This penalty is assessed on taxes paid after April 18th if an extension has not been filed.  If you owe $1,000 on April 18th and do not file an extension you will owe over $1,280 ($1,000 + $30 Late Payment Penalty + $250 Late Filing Penalty + interest).  That’s quite a bill for simply not filing form 4868.

When completing form 4868 taxpayers must estimate the tax they will owe on their 2010 income tax return.  It is very important to make this estimate be as realistic as possible.  Failure to make a reasonable estimate can result in the IRS later rejecting the extension.  Although there is no definition of what constitutes a “reasonable estimate,” taxpayers might consider comparing your 2010 income and withholdings to those on your 2009 income tax return and make proportional changes to their tax liability.  Then, keep this estimate with their other tax documents.

In this article we have discussed the basics and importance of filing an extension.  We have not discussed many other rules that may impact your particular situation.  As always, this article is for informational purposes only.  If you have any question or need assistance with your personal return please feel free to contact our office to talk with a tax professional.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.