Obtaining a six-month extension to file is relatively easy, but it does not mean you can postpone paying your taxes. If you owe money to the IRS, you still have to pay by the original deadline of April 15th, or face penalties and interest. So why would you file an extension in the first place? Here are some possible reasons and scenarios:
- You need more time to gather your documents and receipts. If you have a complex tax situation, such as multiple sources of income, deductions, credits, or investments, you may not have all the information you need by April 15th. Filing an extension gives you more time to organize your records and avoid mistakes or omissions.
- You are waiting for a corrected form or a missing form. Sometimes, you may receive a form that has an error or is incomplete, such as a 1099 or a W-2. You may also be missing a form that you expected to receive from a payer or a financial institution. In these cases, you should contact the issuer and request a corrected or a missing form as soon as possible. Filing an extension can help you avoid filing an amended return later if you receive the form after April 15th.
- You are dealing with a personal or financial hardship. If you are going through a difficult situation, such as a divorce, a death in the family, a natural disaster, or a medical emergency, you may not be able to focus on your taxes. Filing an extension can give you some relief and allow you to deal with your taxes when you are ready.
- You want to reduce your audit risk. Some tax experts believe that filing an extension can lower your chances of being audited by the IRS. The reasoning is that the IRS has a limited time and resources to audit returns, and they tend to focus on the returns that are filed early in the season. By filing an extension, you may avoid being in the first batch of returns that the IRS reviews.
Filing an extension is not for everyone, though. Here are some drawbacks and limitations that you should be aware of:
- You still have to pay your taxes by April 15th. As mentioned earlier, filing an extension does not extend the time to pay your taxes. You have to estimate how much you owe and pay at least 90% of that amount by April 15th to avoid penalties and interest. If you are not sure how much you owe, you can use an online tax calculator or consult a tax professional.
- You may have to pay more interest on your taxes. If you file an extension and pay your taxes after April 15th, you will have to pay interest on the unpaid balance until you pay it in full. The interest rate is determined by the IRS and changes every quarter. For the first quarter of 2023, the interest rate is 3% per year, compounded daily.
- You may lose some benefits or opportunities. If you file an extension, you may not be able to claim certain benefits or take advantage of some opportunities that are available only if you file by April 15th. For example, if you want to contribute to an IRA for 2022, you have to do so by April 15th, regardless of whether you file an extension or not. Similarly, if you want to apply for certain tax credits or deductions that require additional forms or documentation, such as the earned income credit or the child tax credit, you may not be able to do so if you file an extension.
Filing an extension is a simple process that can be done online or by mail. You can use Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, which is available on the IRS website or through most tax software programs. You have to file Form 4868 by April 15th and indicate how much tax you are paying with it. You can pay your taxes online using various methods, such as direct debit, credit card, electronic funds withdrawal, or electronic federal tax payment system (EFTPS). You can also mail a check or money order with Form 4868.
If you file an extension and pay at least 90% of your taxes by April 15th, you will have until October 15th to file your return without any penalties. However, if you file an extension and do not pay at least 90% of your taxes by April 15th, you will be subject to a late payment penalty of 0.5% per month on the unpaid balance, up to a maximum of 25%. You will also have to pay interest on the unpaid balance until you pay it in full.
There are 100’s of Tax Professionals in Orange County that can help with your six-month extension. Contact one of the top enrolled agents, listed right here on our Orange County Tax Pros website.