Tuesday, March 25, 2014

Filing an Extension Can Ease Stress As Tax Deadline Approaches

The IRS expects to process 148 million tax returns this year. So far, they’ve received 75 million, which means, well, a lot of you still have some work to do. April 15th is around the corner, but before you pull an all-nighter, Bob Meighan of TurboTax says consider this alternative.

"If you can’t get it done or you decide that you want to procrastinate for a few more months, file an extension. It's called form 4868," says Meighan.

That form, which is also available on the IRS website, essentially buys you an extra six months, no harm, no foul, but here’s the catch.

"If you owe any tax, you have to pay Uncle Sam by April 15th, so an extension of time to file is not an extension of time to pay," says Meighan.

After the deadline passes, that’s when the penalties start to kick in, and those can really add up.

We’ll start with the failure-to-file penalty, because that one’s the biggie. Five percent of your unpaid taxes for every month that your return is late. Let’s say you owe $3,000. You're looking at a penalty of $150 a month until you pay it. Again, this can be easily avoided by filing for an extension. When you do, you’ll want to send some money with it, a good faith estimate of what you think you owe. Because extension or no, any money you owe the government after April 15th is subject to the failure-to-pay penalty. That’s one half of one percent of the amount you owe for every month you owe it. Plus interest, of course.

"Whatever the interest rate is at the time, you’ll also owe that. So taxpayers that end up owing tax at the end of the year, if they don’t pay it right away, are going to get hit with even a higher bill because of all of the penalties and interest that continue," says Peggy Riley, an IRS spokesperson.

If you absolutely can't pay your balance by April 15th, you can always apply for an installment agreement. There is a one time application fee and your payment plan has be approved.

"And in most cases, as long as it’s a reasonable amount that you’re offering to pay, and it’s going to be paid off in a reasonable amount of time, they’re usually approved. So I always encourage people not to ignore it. It’s not going to go away, it’s actually going to get worse, so work with us and set up something that’s convenient for both," says Riley.