When should you file for an tax extension?
When should you file for an tax extension?
This year's dreaded April 15th fell on a Saturday, giving taxpayers until April 17th to file their taxes. Residents of the District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New York and Vermont were able to file their federal tax returns as late as Tuesday, April 18, 2006, due to Patriot's Day. But even with extra days, many citizens across the country fail to do their taxes in time. What's their solution? Many of them stay in good standing with the IRS by filing an extension.
When Should I File an Extension?
Whether you are filing as an individual, corporation or partnership, if you think you owe tax and just can't get your return together in time, you can file an extension. You won't be the only one; according to the IRS, 8.2 million taxpayers filed an extension in 2003. But take note, an extension to file is not an extension to pay your tax due. The extension must be filed and tax must be paid no later than April 17, 2006, or you will begin accruing a nasty 4.5% failure-to-file penalty and a 0.5% failure-to-pay penalty on any unpaid tax due for each month you don't file, up to a maximum 25% of the amount due.
How to File an Extension
Individuals can file an extension by using Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.Corporations, Partnerships, Real Estate Mortgage Investment Conduits, and certain Trusts use Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns or Form 1138 Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback. If filed by April 17th, these forms give you an extra six months for file your tax return, or until October 16, 2006. If after the six month period, you find you still find you need more time, you can file Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return, which gives you an additional two-month extension.
Filing Form 4868 for an extension is easy and can be filed by mail, via the Web using the IRS's e-file services at www.irs.gov, or by calling the IRS at 1-888-796-1074. The IRS even accepts all major credit cards or debit cards, making it simple to pay your tax bill over the phone or Internet. When you complete your payment using the phone or the Internet, you will receive a confirmation number for your records and need not send in Form 4868.
Please note, if you wish to make a payment using the electronic funds withdrawal option, you must have a copy of your last year's tax return in order to provide your Adjusted Gross Income from that return for taxpayer verification.
Calculate your Tax Bill Accurately
Whether you are filing your extension request on paper, electronically or by phone, it is important to estimate your expected final tax liability as accurately as possible. When you do file your taxes, you can get credit for any payments you've already made. Check the directions on your form to make sure you are filing correctly.
Failing to correctly estimate and pay your taxes on time can be costly. If you underestimate your taxes, you'll have to pay interest on whatever amount you fail to pay by April 17. In addition, if the IRS thinks your estimate is unreasonable, they may disallow your extension, retroactive to April 17, and assess the penalties for filing late tax returns. What does this mean to your wallet? If you owe a payment on your tax return, the IRS will begin monetary penalties on April 17.
If your return is over 60 days late, the minimum failure-to-file penalty is the smaller of $100 or 100% of the tax required to be shown on the return. So, if you fail to file your taxes for two months, you will be paying the IRS at least $100 from your pocket. If you do not pay tax after five months, the 0.5% failure-to-pay penalty continues to increase, up to 25%, until the tax is paid.
If you estimate your tax due and find you are due a refund, you can wait up to three years from the original April 17 deadline to file your return and claim your refund. Why wait that long to collect a much-owed tax refund?
What If I Owe the IRS But Can't Pay?
If you find your wallet can't afford your tax bill, you do have options. You may pay your tax with a credit card, request an installment plan, or make an "offer in compromise." If you'd like to establish an installment plan for paying your tax bill, prepare and attach IRS Form 9465, Installment Agreement Request to the front of your return. Note that the IRS charges a $43 set-up fee, the 0.5% per month late payment penalty on the balance due each month, plus interest.
Under certain circumstances, the IRS may allow you to enter into an agreement called an "offer in compromise." This is an agreement between a taxpayer and the IRS that settles the taxpayer's tax debt by having the IRS accept a tax liability for less than full payment. To file an offer, use Form 656, Offer in Compromise Package
Finally, you can file for an extension of time to pay your tax by filing Form 1127, Application for Extension of Time for Payment of Tax. However, the IRS must receive this form before the April 17th due date.For more information on filing extensions with the IRS, visit www.irs.gov.