How to File for an Extension

Herman's worried about his taxes. Photo by Toastiest.

April 15th is almost here and you’re still not ready to file your taxes.  The penalty for filing your taxes late is 5% of what you owe per month up to 25% of your tax debt. If you owe the IRS $1,000 and you don’t file your taxes on time then you could wind up owing them $250 for being late in addition to the $1,000 tax that you owe. (And it only gets worse.) Eliminate that late filing penalty by filing an extension.  (Okay the due date this year is April 18th, think 15th it’s safer.)

The federal extension form is called form 4868. It’s pretty easy to fill out. Here’s a link to the IRS website to get a copy of the form: http://www.irs.gov/pub/irs-pdf/f4868.pdf
Besides the basics like your name, address and social security number, the form asks you to list your estimated tax liability, what payments you made, and how much you expect to owe. This is the section where people freak out—but don’t!

Estimated tax liability means: how much money do you think the government gets from you this year—this is not how much you still owe or how much of a refund you’re going to get. If you’re using the 1040, it’s the number on line 60. But you’re thinking; “If I’ve already done my taxes, then I don’t really need to be filing an extension now do I?” That’s true– it’s just to give you a clue as to what the form means. If you are completely clueless, use the tax liability from last year’s taxes.

Payments made: includes the withholding from your W2s plus any estimated tax payments that you’ve already made. If you had the IRS keep your refund from last year’s return to pay taxes for 2010, that counts too.
Balance due: How much do you think you need to pay? That would be the tax liability minus the payments made. If you suspect that you’re supposed to owe, then you really should pay your best guess as to your balance due to avoid any late payment penalties. (Or pay as much as you possibly can.)

That’s what you’re supposed to do. Now, let’s talk about what people really do— which isn’t the same as the instructions I’ve just given, but I figure we should tackle a little reality so that you know what the consequences are. These are real issues that real people ask me about every year.

I can’t pay my taxes so I need to file an extension, what should I do? First, the most important thing to know is that an extension doesn’t give you an extension of time to pay, it’s only an extension of time to file. The late payment penalty is ½ of 1% of what you owe per month for each month that you owe. The maximum late payment penalty is also 25% of what’s owed. You’re still better off paying late rather than filing late because the penalty is much lower. If you’re taxes are done, you may as well just file them instead of filing an extension. The late payment penalty kicks in during April whether you file the actual return or the extension—so you’re not saving any money with the extension.

I’m missing some information so I really can’t file but I’m pretty sure I don’t owe. I’ve heard that if you don’t owe that you don’t need to file an extension, is that true? There is no late filing penalty if you don’t owe anything. That said, you might want to file an extension anyway just in case you’re wrong. The extension is free and your butt is covered for the filing penalty in case you do owe.

I have no clue what my liability is or my withholding. I can’t pay anything now if I did owe. What do I put on the form? I get that a question a lot. If you really don’t know, put 0, 0, and 0. You know those numbers are wrong, but at least you’ll have the form turned in to prevent the late filing penalty. Note: if you at least have your W2s, list your liability as the federal tax withheld (box 2 of the W2), the payments as the same thing, and the balance due as zero. At least you’ll have something there to report.

What if I report my tax liability wrong? What if I say the liability is $12,000 and it turns out that when I have all the correct information and I prepare the return that my liability is only $10,000—are they going to expect me to pay the difference anyway? No—you made a best guess with the information you had at the time, and that’s all it was.

What about my state? Do I have to file an extension for my state? Good question. Sometimes yes, sometimes no. If you’re using a computer software program, it will tell you about your state requirements. If you’re just filing by hand, you’ll need to check out your state’s department of revenue website. Here’s the IRS page with state tax agency links: http://www.irs.gov/businesses/small/article/0,,id=99021,00.html

Here in Missouri, if you file a federal extension and you don’t owe Missouri income tax, you can just attach a copy of your federal extension to your Missouri return when you do file. If you owe, you’re supposed to submit an extension form with a check. The important word in that sentence was “check”.

Bottom line: if you know that you can’t file on time, file for an extension. Do not wait until April 18th. It’s not like the old days where the post offices stay open until midnight for tax day. Do it now and get it out of the way.