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I’m a busy person and haven’t had a chance to really dig into my taxes yet.With the deadline looming on April 17, is it a bad idea to ask for an extension so I can get them done properly—or, worse, if I find out I’m having trouble scrounging together the cash?
Getting your taxes done right is certainly the way to go.
Instead of rushing yourself (or your tax preparer) through them, asking for an extension is a pretty painless and penalty-free process.
Here’s what you need to do (and one catch you need to consider).
File a Penalty-Free Extension
Filing an extension gives you a lot of extra time to get your taxes in order. The default extension is six months, which means you have until October 15, 2012 to finish your taxes.
That’s a considerably better option that the 5 per cent per-month fee the IRS will charge you if you don’t file your taxes at all.
Filing an extension does not come with any penalties and it doesn’t make you a target for an audit.
In fact, the IRS doesn’t even bother to ask you why you want an extension, but here are a few reasons why it might be a good idea to take yours.
- You don’t have the time to do all the research necessary to get the biggest refund and file your taxes the right way.
- You’re still waiting on income forms or corrections from employers.
- You think your tax preparer could use a little extra time while you scrounge up a few more receipts.
You must submit your extension request by the tax deadline of April 17.
But Here’s the Catch
It’s not all roses with an extension.
If you owe money on your taxes you’re still required to pay them by the April 17th deadline.
While this is a bit counterintuitive since you’re probably thinking to yourself, “I’m asking for an extension because I haven’t done my taxes,” the IRS still expects you to estimate your taxes and pay anything you might owe.
The quick and dirty way to do this is to run through a simple version of your taxes without going through all your credits and deductions and see where you stand.
If you end up owing money you have to pay that by the tax deadline, but the IRS will reimburse if you file your taxes and end up owing less or getting a refund.
The key thing to remember is that filing for an extension only extends the period of time to file your taxes.
It’s not an extension for any payment you owe.
You Can Set Up a Payment Plan for Taxes Owed
If you can’t pay the full amount of taxes you owe by April 17th you can set up a payment plan directly through the IRS.
Depending on how much you owe and how quickly you pay it off you’ll run into a few cons by doing this.
If you pay the full amount within 120 days you won’t incur any fees.
After 120 days you have to pay to set up a repayment agreement and that comes with some processing fees:
- $52 for direct debit (taken directly out of your account monthly).
- $105 for a standard agreement or payroll deduction (taken out of your paycheck monthly).
- $43 if your income is low.
You will also be charged interest fees on top of the above processing fees. The interest changes each quarter, but the current rate is 3% for the first quarter of 2012.
However, if you were self-employed or unemployed last year you may qualify for an extension on the amount you owe.
You qualify if you were unemployed for 30 consecutive days between January 1, 2011 and April 17, 2012 or if your self-employment business lost 25 per cent of it income.
The extension drops the penalty fees for not paying, but the amount you owe still collects interest until you pay it off. You can file this extension by filling out form 1127A.
An extension is a good idea if you’re waiting on a few more documents to trickle in or you’re just too swamped to spend the time needed to get your taxes done right.
The only cause for hesitation is if you owe money, but even then it’s a pretty simple process to pay an estimated amount and figure out the details later.
P.S. Are you planning on filing for extension? Share your reasons and tips in the comments.