Filing a Tax Extension: How to Do It and How It Affects What You Pay

You're poring over your paperwork -- schedules, forms, receipts, investment statements. Thus far, you've been able to navigate the thorny process. But you've just hit an obstacle that seems insurmountable. Maybe it's the circuitous logic of Schedule D that sends your head spinning. Perhaps you realize you're missing a W-2 from your employer. Whatever the case, you need an additional 24 hours -- or 24 days -- to set things straight. Luckily, the IRS has accounted for these all-too-human setbacks. It's called Form 4868 -- the automatic extension form -- and it gives virtually anyone who files it before April 15th an additional four months to file a return.

The Catch
Sound too good to be true? It almost is. Filing for an automatic extension does not give you more time to pay. In fact, you must still estimate the amount you owe (if you owe, that is) and pay it by check, money order or credit card by April 15. "There's really no good reason to file an extension if you've already done your paperwork," says Bill Ahern, Communications Director of The Tax Foundation, a Washington, D.C.-based organization devoted to explaining tax policy to the public. So what's a "good" reason to file an extension? "A common scenario would involve a procrastinating taxpayer who finds herself with disorganized records as April 15th approaches. At the last minute, she runs to a tax preparer for help, only to find that other clients have priority. At that point, the tax preparer will help her file for an extension."

How to File
If you do need the extra time to avoid being charged a late-filing fee (see Repercussions for Filing Late, page 3), the filing process is fairly simple, even if you're not using a tax preparer. You should have last year's tax return information available when filing an extension and making a payment. You can file for an extension in several ways:

  • Download Form 4868 from the IRS Website, complete it and mail it along with payment (check or money order made out to the United States Treasury) of your estimated tax owed. Click here for a link to a downloadable version of this and other extension forms.

  • File by phone. Call (888) 796-1074 and follow the automated instructions. You must have filled out a Form 4868 as a worksheet in order to complete the process by phone. You will be asked questions about last year's tax return, so have it available.

  • File online using a service listed on (but not endorsed by) the IRS Website.

  • File online using tax preparation software, such as Quicken TurboTax.

  • File with a professional tax preparer, such as H&R Block.

Estimating Your Tax
In order to estimate how much you owe, you can use last year's return as a benchmark if nothing much has changed in your financial life (including marital status, investment activity and income bracket). Otherwise you -- or your tax preparer -- will need to do some cursory calculations to figure out what you might owe. You want the estimate to come close to the real figure: You will be charged a late payment penalty fee if the unpaid balance is more than 10 percent of your amount owed. Also, you will be charged interest (1/2 of one percent) on any amount not paid by April 15.

SPECIAL CASES

Special Circumstances
If you are living outside the United States, you are automatically allowed a two-month extension on filing your return and paying taxes (due date of June 15), no paperwork involved. However, you will be charged daily compounded interest (currently around six percent -- it changes quarterly) on any tax due that is not paid by April 15. For more information on filing as a U.S. citizen or resident alien living abroad, click here. If you are living outside the U.S. while serving in a combat zone (this includes members of the Armed Forces and the Red Cross), you are granted 180 days from the last day you are in the combat zone to file your return and to pay taxes. For more information on filing as a member of the Armed Forces, click here.

Repercussions for Filing Late
Even if you cannot afford to pay all of your taxes, you should still file your return -- or file for an extension -- by April 15 to avoid being charged a failure-to-file penalty. The penalty for filing late can be minimal or hefty depending upon how much you end up owing: If you file after April 15 (or after your extension deadline), you will usually be charged five percent of your unpaid balance for each month you don't pay, up to 25 percent. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $100 or 100 percent of the unpaid tax. (The exception is if you can show reasonable cause for filing late.)

If You Can't Afford to Pay
When you file your return or extension, include a check for as much as you can afford. For the remainder of your balance, either make a written request for a payment plan or fill out a Form 9465. The IRS has information online about late payment options. It accepts payment by VISA, MasterCard, American Express and Discover Card. (One thing to remember: Your credit card will charge you interest; so pay it off as soon as possible.) Also keep in mind that each month the IRS charges 1/2 of 1 percent of any unpaid balance after April 15. The maximum penalty cannot exceed 25 percent of your unpaid balance. It's always best to pay as much as possible and to pay on time.

If You Still Need More Time
If, after receiving the automatic four-month extension, you find you need still more time to file, you can file a Form 2688 for an additional time -- usually two more months (six months is the maximum amount of time allowed by law for an extension on filing taxes -- that includes the four-month automatic extension). In order to qualify for the additional extended time, you will need to file Form 2688 by the end of your four-month extension and have a good reason for not being able to file within that time. Download Form 2688 here.

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