Beware of False Hope – Automatic IRS Filing Extension

In 5 minutes, you could get a 6 month extension.

Did you know that you can get a 6 month extension to pay your taxes? Just file Form 4868 and voila! You just got six more months to get the funds together to pay that tax bill. Sounds super easy, why isn’t everyone doing it?

Well, the IRS doesn’t always say what they mean and mean what they say. You’ve seen their forms and instructions. It’s almost like they’re trying their very best to trip you up.

Do they Want Us to Screw Up?

First off, let’s be clear here. Even calling it an “Automatic Extension” is highly misleading. It is not automatic and it is not an extension to get more time to pay your taxes.

So what do they mean? Well, automatic means that the IRS doesn’t ask why you want the extension. And that extension only gives you an extra six months to file your taxes. See, they are happy to give you a bit more time to organize your receipts and calculate the exact amount of your tax liability. You still have to pay with the rest of us; on time. Still, how can you be expected to pay if you don’t know how much? Well, that part is actually fairly easy. You estimate based on what you paid the previous year, fill out Form 4868 and send a check. If you didn’t pay your taxes in 2010, you may be getting a red letter and an audit this year.

You need to pay at least 90% of your tax liability to be safe. That gives you an additional 6 months to pay that other 10% without any penalties. If you pay less than 90% though, you might have to pay 0.5% per month on the remaining amount you owe. So if you owe a total of $10,000 in taxes and you send the IRS a check for $8,000 you would be charged an additional $5.00 per month ($10,000 x 90% = $9,000 - $8,000 = $1,000 x 0.5% = $5.00).

It may seem like a lot of effort just to hold off on such a small amount. You still have to file your taxes by April 15 (but you only have to file form 4868 so it’s a lot less paperwork) and you still have to pay a good portion of your taxes on time, but the extension can still save you a lot of money.

If You Don’t Pay on Time, You’ll Pay Big Time

If you don’t pay your taxes by April 15 and you didn’t file an extension you will be charged a 0.5% “failure to pay” penalty, as described above, but the IRS will also tack on an additional 5% per month “failure to file” penalty on your total remaining balance. If you owe the same $10,000 as in the example above, you are now paying $550 dollars per month in penalties, instead of just $5.00. Not very logical right?

So apply for the extension. The IRS will always grant you one. Even if you end up not paying any of your taxes at all, you still save $500 a month (assuming a $10,000 liability) because you aren’t getting charged for failure to file. So take the 5 minutes to fill out Form 4868 and save yourself the money and the audit.