Tax Extensions & Underpayment Penalties, a Primer
Long time Commonsense CPA readers will recognize that a version of this discussion went out last year, around this time. Well, that's because tax extensions and the penalties associated with underpaying taxes are two extremely common topics every April - these questions and our info are evergreen.
So without further ado: What is a tax extension anyway?
A tax extension provides additional time to file your tax return, not to pay any taxes owed. The IRS offers an automatic six-month extension for those who cannot file their tax by the due date. We handle this service for our clients but if you’re doing your taxes yourself here’s a handy guide (and reminder to call us next year!).
This moves the filing deadline from April 15 to October 15.
Why File a Tax Extension?
More Time to Gather Documents: If you’re waiting on tax documents or need more time to organize your financial information, an extension can be invaluable.
Avoiding Errors: Rushing to meet the deadline can lead to mistakes on your tax return. An extension gives you more time to double-check your details.
Complex Financial Situations: Those with more complicated finances might need extra time to accurately prepare their tax returns.
How to File a Tax Extension
Filing for an extension is straightforward but if you’re a Harmony client that requires extension we are handling that for you:
Form 4868: Complete and submit IRS Form 4868, “Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.” This can be done electronically or on paper.
Estimate and Pay Taxes Due: It’s important to estimate and pay any taxes you owe by April 15 to avoid interest and penalties.
Consequences of Not Filing an Extension
If you miss the April 15 deadline and haven’t filed for an extension, you could face penalties:
Late Filing Penalty: The penalty for filing late is typically 5% of the unpaid taxes for each month that the tax return is late.
Late Payment Penalty: If you owe taxes and don’t pay by the deadline, you’ll face a late payment penalty of 0.5% per month of the unpaid tax amount. An important thing to note (which bears repeating) is that even if you file an extension any unpaid taxes are still due April 15th which makes the below tips quite important.
Important Tips for Filing an Extension
Estimate Your Tax Liability: Use last year’s return as a guide, or consult a tax professional to estimate how much you owe.
Pay as Much as You Can: To minimize interest and penalties, try to pay as much of your estimated tax liability as possible by April 15.
Keep Copies and Records: Always keep a copy of your extension form and any proof of payment you have made.
We hope this newsletter has demystified the process of filing for a tax extension. Remember, while an extension grants more time to file, it does not extend the time to pay your taxes.
Thank you for reading, and best of luck this tax season!