Dealing with tax returns isn't usually fun. And April 17 is the filing deadline for submiting your 2017 taxes. But what if you need a bit more time sorting out your taxes for your tax returns? You can easily file for an extension to pay your taxes — here's how to file an extension request and avoid a failure-to-pay (also known as a failure-to-file) penalty.
File an Extension Request: Whys and Hows
There may be many reasons you need to file for an extension on your tax return. Personal changes such as marriage or divorce, a long-term illness of a family member or just a crazy work schedule may be possible reasons.
The IRS will automatically grant you a timely filed extension, so you do not need to qualify for one by proving you need more time. The IRS does not require you to make an explanation statement — however, some tax preparation software programs may. Please rest assured, if so, that this is only informational, and will not in any way impact whether or not the IRS will grant you the extension to pay your taxes. It's called late filing.
You can file for an extension the old-fashioned way, or the modern way. To go the old-school route, you will need to fill out tax forms like the Form 4868: Application for Automatic Extension of Time to File. If you are a business filer, you will want to file Form 7004: Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns. There are a ton of tax forms you'll have to fill out, so these are only the start of your application for extension.
The easiest way to obtain an extension of time to file is to do so online. If you are using tax preparation software, it should allow you to file for an extension online right through the program. If you are using one of the IRS’ free filing tools, you may file an extension that way, as well. Filing for an extension is easier online for a lot of people.
How long does an extension last? In general, an extension is six months since you still owe taxes, giving you until Oct. 15 to file your taxes if you are on extension. If the IRS rejects your e-filed return after Oct. 15, you have until Oct. 20 to refile it. Otherwise, you will need to mail your return in. Please be sure to sign your return, as the IRS rejects many paper returns solely because they’re missing a requisite signature.
An Extension Does Not Grant Extra Time to Pay
The most confusing — and critical — aspect of filing an extension is that the filing of an extension does not give you extra time to pay your tax obligations. Even if you file for an extension, you must pay at least 90 percent of the total tax due to avoid a late-payment penalty.
The IRS penalty for late payment is 0.5 percent of the unpaid tax amount, compounded monthly, up to 25 percent. In addition, the IRS charges interest on unpaid taxes, and, as this compounds daily, the interest can add up quickly. It's also important to note that while the IRS will abate penalties, including failure-to-pay penalties, for cases that meet their reasonable cause criteria, they cannot abate interest unless they find an IRS — not taxpayer — error caused the interest to accrue.
The preferred method of paying your tax obligations is to open an account online with EFTPS.com. This portal, the Electronic Federal Tax Payment System, is the most secure way to ensure the federal government properly credits tax payments to your account. It is totally free to sign up, and you can choose to have recurring payments or make a one-time payment. You can also use this portal to make estimated tax payments if you are self-employed.
There are special situations for Active-Duty Military, Taxpayers Overseas, Disaster Areas.
In certain situations, you may qualify for an extension for filing your taxes without having to file Form 4868, and you'd be able to extend your filing deadline. These exceptions apply only to individual tax filers, not to business filers.
The first exception is if you are an active-duty military member who is stationed overseas in a combat zone. If this applies to you, you will automatically receive 180 days from the day you leave the combat zone to file and pay any taxes due. You do not need to file Form 4868. You do, however, need to be stationed overseas in a U.S.-designated combat zone.
If you are a U.S. citizen who is living abroad temporarily or an active-duty military member who is stationed overseas but not in a designated combat zone, you have until June 17 to file. However, you must still pay any tax due by the original due date of April 18.
For those taxpayers affected by natural disasters, such as victims of the 2017 Hurricanes Harvey, Irma and Maria, the IRS has extended both the filing and the payment deadline until April 30, and they won't face any tax liability for filing late. Taxpayers in affected areas should also pay careful attention when filing to claim any casualty losses to which they may be entitled.
Upcoming Tax Changes to Note:
The advent of the Tax Cuts and Jobs Act of 2017 has created much confusion about tax obligations under the plan. One of the most frequent questions tax practitioners get is how much to pay in estimated tax deposits — for self-employed people — or how to adjust withholding to avoid paying too much throughout the year, without triggering a huge tax liability at the end of the year.
The U.S. has a pay-as-you-go tax system. If you are self-employed, you will file your quarterly taxes at the end of each fiscal quarter, and if you are a W2 employee, your employer will take care of withholding tax from your paychecks. However, due to the Tax Cuts and Jobs Act, the tax rates are changing significantly for 2018.
If you are an employer, the IRS doesn’t recommend you distribute new Form W4, Employee's Withholding Allowance Certificate, as the IRS is still finalizing the new form for the 2018 tax year. However, if you are an individual filer and your employer doesn't offer these forms to you once they are finalized, you should request an updated W4 from your employer.
With the implementation of the Act, your tax rates may be lower. So you should avoid having the government withhold money and hold it interest-free until the end of the year, unless you are one of the many people who use their excess withholding as a mini “savings account” for a vacation or other delight without the temptation of having that money on hand to spend.
If you make estimated tax payments as a self-employed individual, you may likewise wish to recalculate your quarterly estimated tax payments. Again, you must pay 90 percent of the tax you anticipate owing for the current year, divided into four equal payments, or you must pay 100 percent of the tax due the previous year. Your tax-preparation software should help you calculate your estimated taxes, or you can use this tool to do so.
The 2017 tax season is well underway, and in addition, exciting changes are in store for 2018. By planning ahead for the new tax year, including planning for extra time to complete your filing obligations, you'll be well on your way to being compliant with IRS requirements and remaining free from the stress of dealing with the IRS.
Now you know how to file a tax extension. Do you have any tips for navigating a federal extension or extension form application without facing any penalties for upaid taxes?