USA TODAY International Edition
Your tax extension deadline is looming
Know what you owe and what to do about it
If you’re one of the roughly 15 million taxpayers who asked the Internal Revenue Service for an extension on filing your federal taxes in April, time’s almost up.
The federal tax extension deadline hits Oct. 15.
By submitting Form 4868 as of April 15, you gave yourself an extra six months to file your taxes. If you miss the October deadline, you’re likely to face a hefty penalty for failing to file.
More than one in 10 taxpayers asked for an extension this year, according to IRS statistics. Typically, taxpayers who asked for one needed more time to gather tax documents, or they had complicated taxes that required additional prep work. On top of that, taxpayers are grappling with the ins- and- outs of the new tax code, which President Donald Trump signed into law in December 2017.
“There were a lot more extensions this year really due to the complexity of the Tax Cuts and Jobs Act,” the law that overhauled the tax code, says Bill Smith, managing director for CBIZ MHM’s National Tax Office.
He says, “In October, the key is to make sure you have your documents together. If you are missing anything, you will have to get the documents very quickly – you are running out of time.”
Tax extension date: What to know
Some taxpayers mistakenly believe the six- month extension provides an extra half- year to pay any taxes owed to the IRS, says Lisa Greene- Lewis, a CPA and tax expert with TurboTax.
“It’s a misconception, and we always emphasize that – it’s just an extension to file. The IRS wants you to pay 90% of what you owe” by April 15, she says.
Taxpayers who owe the IRS should have sent in an estimated payment before the regular tax deadline in the spring. If they didn’t – or low- balled what they owe the taxman – they could be on the hook for an underpayment penalty.
Underpayment penalties
If your tax return shows you didn’t pay at least 90% of your tax bill by April 15, the IRS will sock you with a penalty of 0.5% per month on the unpaid amount until the rate reaches 25%, Greene- Lewis says. It could take about four years to hit that limit – unless you’ve failed to file taxes, which carries a higher penalty. The IRS charges interest on the amount you owe.
Estimating correctly could be tricky for taxpayers who hadn’t gathered all their documents by the April deadline. Some tax preparers who wanted to help clients avoid the penalty may have overestimated what was owed by clients who filed extensions, Smith says.
“If you overpaid, you’ll get it back when we file the return,” he says. “That’s not the worst thing – the worst thing is there are people right now putting off filing or getting the info they need” to file before Oct. 15.
If you miss the Oct. 15 deadline
Taxpayers who don’t file by Oct. 15 can face even higher penalties, tax experts say. The IRS will sock you with a “failure to file” penalty of 5% a month on your unpaid tax bill for up to five months, maxing out at 25%. If you face penalties for both underpayment and failure to file, the IRS will charge the higher fee of 5% until that penalty hits 25% after five months, but Smith notes that the underpayment penalty will continue to run at 0.5% per month beyond that.
If you owe either penalty, the IRS will calculate your fine after you file your return, says Eric Bronnenkant, head of tax for financial services firm Betterment.
“Pay what you owe, and let the IRS send you a bill for the amount of interest and penalties that you owe,” Bronnenkant says.
Last- minute retirement savings
Some business owners and self- employed workers may still be able to sock away retirement savings for the 2018 tax year if they have a simplified employee pension individual retirement account, known as a SEP- IRA, tax experts say.
That’s because SEP- IRAs allow prioryear contributions as late as Oct. 15 – as long as an extension was filed.
If you qualify for a SEP- IRA but don’t have one, you “can set one up today and fund that contribution” before the October deadline, he says
Tax penalty relief
The IRS may waive penalties in certain cases. There’s also relief through the agency’s “first- time penalty abatement” program, CBIZ’s Smith says.
This program is open to taxpayers who haven’t paid penalties in the previous three years, among other criteria.