Tax Day is only six days away. Your tax return, and any balance due if you owe, is due this coming Monday, April 15. If you have not filed your tax return by now, it is time to start thinking about whether an extension makes sense for you.
What is an extension?
The IRS will give you an automatic six-month extension of time—to October 15—to file your federal tax return. All you have to do is ask!
State rules vary here. Some states provide an automatic extension without you having to ask, others give you an automatic extension if you obtain a federal extension, and others require you to file a separate state-level request. Be sure to check the rules in each state where you might have to file a tax return!
However, an extension of time to file is not an extension of time to pay. Any tax owed is still due on April 15, even if you have an extension. It does not matter if you do not yet know how much you owe the IRS because April 15 is the due date for that calculation. Late-payment charges (more on that below!) apply to any portion of tax not paid by the deadline.
How do I request an extension?
If you work with a tax professional to file your taxes, they can (and should!) file federal and state extensions for you if you need one. Be sure to ask. For the do-it-yourself crowd, you have a few options to request a federal extension:
Use IRS Free File to electronically request an extension.
Print and mail Form 4868.
Make a payment towards your expected balance due. (Be sure to select the “extension payment” option and the 2023 tax year.)
Use your chosen tax software vendor to electronically request an extension. This may involve a cost, though, so use one of the free options above instead.
Whichever option you choose, be sure to (1) file the extension on or before April 15 and (2) obtain proof of filing your extension request by the deadline, such as a physical or electronic postmark. Do not simply drop your Form 4868 in the mailbox at 11 p.m. (I have litigated federal tax cases where timely filing was the central issue, including one worth seven figures!) Remember to file your state extension(s) as well!
What happens if I file or pay late?
Unsurprisingly, federal law provides penalties and interest when you file or pay late. These can add up quickly.
The late-filing penalty can be as much as 25% of any balance due, and it adds up quickly at 5% per month. Do not file late. Request an extension now, and make sure that you meet the extended deadline, even if you cannot pay.
If you are waiting on one more tax document and think it might arrive this week so you will be able to file by the deadline, request an extension anyway. Going on extension does not prevent you from filing by April 15; it simply allows you until October 15 to file. Avoid having to potentially scramble at the deadline by requesting an extension today.
If your late filing is fraudulent, the late-filing penalty can be as much as 75% accruing at 15% per month.
The late-payment penalty can also be as much as 25% of any balance due, but it adds up much more slowly, at 0.5% per month.
In addition to a late-payment penalty, you will owe interest on any balance due. The interest rate on taxes owed (an “underpayment” in tax parlance) is 8% annually, compounded daily, at the time of writing. Combined with the late-payment penalty, this means that late-payment charges are currently equivalent to a 14% annual interest rate.
Interest rates for late payment can change quarterly, so you could end up paying an even higher interest rate the longer you maintain a balance.
Can I avoid these penalties?
Yes, you can avoid these draconian charges.
The only guaranteed way to avoid a late-filing penalty is to file on time, either by April 15 or October 15. But you only get the extended deadline if you file a valid extension request on or before April 15!
To avoid the late-payment charges, pay what you owe now. Yes, this probably involves some guesswork. Owing late-payment charges on $100 is better than owing late-payment charges on $1,000, so it is worth the effort to estimate!
While that is easier said than done, it is not as difficult as it sounds. Simply prepare your return using the tax software of your choice. Enter good-faith estimates as placeholders for any outstanding information. Estimate high for income items and low for deduction items to give you some wiggle room. This will give you a projected return result (and make it easier to finalize your return when you are able, since you already completed most of the work!).
If your projected return result is a refund, excellent! No payment is required; simply file your extension request. Alternatively, make a small payment now (perhaps even $1) to obtain the extension itself. Any payment now gives you additional flexibility should your estimates be off, and you will get it back as part of your refund when you eventually file.
If your projected return result is a balance due, in a perfect world you would round that up a bit to give yourself some extra breathing room and pay that amount now to obtain your extension.
Our situation last year is a classic example. We expected to owe around $5,000 on our federal tax return. We planned for this and had the money set aside in a dedicated high-yield savings account. However, we could not file by the regular deadline because we were still waiting on an outstanding K-1. On March 29, I submitted an extension payment (scheduled for April 14) for $5,300. When we filed our return during the extension period, we received a modest refund after accounting for the extension payment.
Even if you cannot pay the full amount you expect to owe, pay as much as you can before April 15 to minimize the eventual late-payment charges. If you expect to owe $1,000, and pay $200 of that now, only the remaining $800 is subject to late-payment charges. You can also make additional payments before you file. Paying another $200 in June, for instance, means only the remaining $600 is subject to late-payment charges afterwards. You will get credit for all the advance payments when you eventually file.
In short, if you expect to owe, pay as much as you can as early as you can to cut down on late-payment charges. And even if the amount you can pay now is zero dollars, at least file the extension request to avoid the late-filing penalties.
This sounds hard. Can I get help?
Keep in mind that you do not need to file a separate federal extension request if you make a timely (i.e., on or before April 15) federal extension payment. The extension payment doubles as the extension request. Your state(s) have their own rules, though, so be sure to check those as well.
If projecting your potential balance due and figuring out an attack plan sounds overwhelming, take comfort in knowing that many others feel the same way, and reach out to me for help today. We can avoid the late-filing penalties and eliminate (or at least minimize) the late-payment charges.
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