While most U.S. federal taxpayers have good intentions of filing their returns by the standard due date, the reality is that sometimes time is not on our side. Different tax rates apply to capital gains, dividends, and other investment income which causes more and more delays with taxpayers receiving their corrected 1099's, K-1's and other tax documents on time. There is so much confusion regarding when & why to file a federal tax extension that it is important that tax filers understand that it's not a "bad" thing if you have to take your time, get your return correct the first time, and file an extension.
First, filing Form 4868 "Application for Automatic Extension of Time to File US Individual Income Tax Return" allows a taxpayer an automatic six-month extension for tax year 2006 to file their tax return but it does NOT extend the time to pay your tax. A taxpayer has until October 15, 2007 to file their 2006 tax return if they filed Form 4868. Corporations have until September 17, 2007 if they filed Form 7004. These forms may be e-filed (electronically filed) with the IRS.
Second, there are still some taxpayers that believe that if they file an extension (Form 4868) that they have avoided penalties & interest altogether. That is not true. There are two penalties levied on the taxpayer: late filing penalty & underpayment/late payment penalty. In addition, interest is charged during the months that the taxpayer does not pay the full amount of tax due after the filing deadline. Generally, there are no penalties & interest assessed on zero balance or refund returns.
Late Filing Penalty
The taxpayer avoids the "late filing fee", which can be significant (5% per month up to a maximum of 25%), if they file an extension by the tax deadline. However, they do NOT avoid penalties & interest on late payments of tax due.
Late Payment Penalty
Even though the taxpayer filed an extension by the tax deadline, there are two reasons why a taxpayer would still be charged a penalty:
• Taxpayer owes a tax liability but failed to mail in a payment with their extension on the "estimated" tax due by the tax filing deadline
• Taxpayer's "estimated" tax payment filed with their extension fell short of the actual amount of tax liability due calculated upon complete preparation of the federal tax return.
There are two "safe harbor" calculations from which the taxpayer can avoid the late payment penalty (0.5% per month):
1) Taxpayer paid at least 90% of their tax liability due in the current year by the tax deadline either through federal withholding, estimated quarterly tax payments throughout the tax year, or via an "estimated" tax due payment filed with their extension
2) Taxpayer paid 100% of the previous tax year liability (110% for taxpayers above a certain AGI) paid via the same means listed in #1; if the taxpayer's previous year tax liability was zero, they will not owe any late payment penalties for the current year.
Interest
Interest charges add up when you fail to pay the full amount of tax owed by the tax filing deadline. Interest is charged at a rate of approximately 8% of the unpaid balance. Filing an extension does NOT waive the interest accrued on the unpaid balance.
Can't pay all of your taxes by the tax deadline? You can file Form 9465 "Installment Agreement Request". The IRS must agree to accept the payment of your tax liability in installments before you can begin paying in this manner. The tax must be paid within 3 years and there is a one-time fee including interest on the unpaid balance.
Extension for Severe Hardship
If paying the tax due would cause you to suffer a severe hardship, you may apply for a special payment extension on Form 1127. A statement of assets and liabilities and recent expenditures and receipts must be attached. This extension is generally limited to six months. Should the IRS allow the extension, you will still owe interest on the late payment.
If you want more information on the above material, visit IRS.gov & refer to Publication 54 & Publication 17. |
