What to Know Before Filing an Extension

Filing taxes can be stressful, and it can feel like a race against time, especially with the looming April 15th deadline. Even if we plan ahead, unexpected events like a sudden surge in workload, personal emergencies, or procrastination can leave us scrambling as the deadline approaches. It's essential to understand your options in these moments, particularly when it becomes apparent that meeting the traditional filing deadline is not possible.

One of the most common solutions to this problem is an IRS-approved extension. It's not a perfect solution, however, and there are some essential variables to consider before asking for your deadline to be extended.

To help you understand this issue more clearly, let's walk through the pros and cons of seeking a tax filing extension.

Asking for an Extension

The mechanics of getting a tax extension are straightforward: file Form 4868. Approval is automatic, giving you exactly six months to get your financial house in order.

However, it's important to realize that the IRS is merely approving a late filing - they still want you to pay the money you owe on time. You'll need to estimate your total tax debt at the time of your request and send in that estimated amount. If that payment proves to be too low once you file in October, you'll have to pay interest on the difference. That interest rate is around eight percent annually (compounded daily), which can add up quickly.

If you miss your extended October deadline, you'll likely be assessed a late filing penalty of an additional eight percent of the total tax liability. It should be noted that there are a couple of ways to extend your filing date automatically:

• If you've worked outside the U.S., you qualify for a two-month delay.
• You can get up to six months of added time if you're a deployed military member.
• If you're affected by hurricanes, floods, or other natural disasters.

Sometimes, you may also wish to appeal to the IRS directly without opting for an official extension. If you've lost a loved one, suffered severe health issues, or been the victim of a crime, the IRS may choose to let you file late without penalty. The IRS also offers a one-time penalty abatement waiver for those without a record of late payment or filing.

What If I Can't Pay?

Your best bet is an installment plan if you can't pay your taxes. The government will work with you to come up with monthly payments you can afford and, in most cases, will give you up to several years to repay your debt.

There is a caveat, however: unless you can pay all taxes within 180 days, the IRS charges you up to $225 to enroll in a payment plan. Additionally, you'll keep paying interest on your debt until it is repaid in full.

The Takeaway

Filing an extension is an easy process, but it's critical to understand the pros and cons. By exploring the issues raised above, you can determine which course of action is best for you. And if you are having trouble making your tax payments, seek the advice of a qualified professional.