Simply fill out form 4868 by April 15 and you get an automatic 6-month extension to file your taxes! Sound amazing and too good to be true? That’s because it probably is.
If you are like most people, you may have naively assumed that what the IRS says and what they mean are one and the same (crazy, huh?). The IRS is a lot like a woman in this regard; saying one thing does not automatically preclude them from meaning something entirely different.
Before we get into what a tax extension is, let’s quickly go over what it is not. The IRS tax extension is not an extension of time to pay your taxes, nor is it automatic; regardless of what the IRS calls it.
So, if the “automatic tax extension” is neither automatic nor an extension, what is it? You see, when the IRS says “automatic,” what they really mean is “no questions asked” and when they say “extension” they mean extension to file, not extension to pay.
What an automatic extension grants you is an extra 6 months to fill out all the paperwork and calculate your exact tax obligation. When you fill out form 4868, you are asked to approximate your tax obligation for 2011 and send in a check for that amount. This is actually a lot easier than it sounds. If you’ve paid your 2010 taxes you will probably be able to ballpark what you owe for 2011. If you haven’t paid your 2010 taxes, you may be in for an audit.
If you pay at least 90% of your actual obligation, you’re golden. You’ve earned yourself another 6 months to come up with the remaining ten-or-so percent without being penalized. Anything less than 90%, however, is subject to a late penalty of 0.5% per month. (if you owe $10,000 in taxes and send a check for $8,000, you are charged $5 per month [$10,000*90% = $9,000 - $8,000 = $1,000*0.5% = $5]).
All that work for a lousy 0.5% a month? Not quite. Yes, you still have to file paperwork by April 15 (albeit, much less paperwork – Form 4868 is only a few lines) and you still have to pay most of your taxes, but utilizing the extension can save you a significant chunk of change. Keep reading to find out just how expensive the alternative can be.
April 15 rolls around and you forget to pay your taxes. You also forget to file an extension. Now you’re subject to the 0.5% “failure to pay” penalty discussed above AND a 5%-per-month “failure to file” penalty on the full balance. Assuming a $10,000 tax obligation, you’ve just earned yourself an extra $550 in penalties every month you are late on your payment. Talk about shooting yourself in the foot.
Remember, the IRS will never say no to an extension request and besides, what’s the worst-case scenario? You file the extension and pay none of your taxes? Well, assuming a $10,000 tax obligation, you are still saving $500 per month by avoiding the 5% per month “failure to file” penalty ($10,000*5% = $500). So, do yourself a favor and take 5 minutes to fill out Form 4868; you’ll save yourself and your wallet the huge burden of penalties.