Taking a 6-month extension to file your taxes gives you more time to prepare your return. That doesn't mean that you can hold off on filing indefinitely, however.
The 6-month tax extension deadline arrives on October 15, but you don't want to leave getting your tax papers in order until the last minute. These tips can help you get ready for the filing deadline so you don't run the risk of triggering penalties.
What Is a Tax Extension?
If you are wondering what is involved with filing an extension, it’s actually a very simple process. Typically, your income tax returns would be due in April, but requesting a 6-month extension gives you more time to file.
The IRS extended the tax filing deadline to May 17, 2021 for the 2020 tax year. This is also the new due date for taxes. The October 15 extension connected with Form 4868 remains the same.
To request an extension, you'd need to submit Form 4868 by the regular filing date of April 15. You don't have to give a reason for requesting an extension. The IRS will review your request and in the majority of cases, grant you extra time to file provided you meet the eligibility requirements.
Form 4868 will require you to show your properly estimated tax liability based on the information that is available to you.
Why File a 6-Month Tax Extension?
People may file for a tax extension for a number of reasons. An extension is typically used by people who need more time to get all of their information ready. For example, if you're an independent contractor you may need more time to file if you're still waiting on some of your clients to forward your 1099s. Or, you might need an extension if you noticed an error on a 1099 or another key tax form that you're trying to get corrected before filing your return.
Remember, a filing extension does not mean that you have an extension on paying your taxes. Taxes owed are still due by the regular April filing deadline, which is May in 2021. The only exception is Texas, and parts of Oklahoma and Louisiana declared winter-storm disaster areas by FEMA. The filing and payment deadline in these areas was extended to June 15, 2021.
Failure to file your taxes and failure to pay your taxes can both result in penalties and interest. Here's how the IRS penalties can add up:
- Penalty for failure to file: For every month that you don't file your taxes, your penalty will be 5% monthly of the net tax due. The penalty maxes out at 25%. In addition, there is also a minimum penalty that kicks in 60 days after the due date or extended due date. The minimum penalty is the smaller of $435 or 100% of unpaid tax.
- Penalty for failure to pay: For every month that you don't pay your taxes, your penalty will be 0.5% monthly of net tax due. Again, this number is not to exceed 25%, which means that the failure to pay penalty will generally not exceed 50 months. In addition to the penalty for failure to pay, interest accrues on any balance due.
- Penalty for failure to file and pay: For any months in which you have failed to file and failed to pay, the failure to file penalty will be reduced by the 0.5% failure to pay penalty. This takes the failure to file penalty to 4.5%, while the failure to pay penalty remains 0.5%. Therefore, if a taxpayer both fails to file and fails to pay, the combined monthly penalty is limited to 5% for the months where both are outstanding.
Of course, you wouldn't have to worry about the failure to pay penalty if you're owed a refund or you have $0 tax liability for the year. But, filing a 6-month extension means waiting that much longer to receive your tax refund.
Get Your Return Ready Now to Avoid Penalties
If you filed for an extension, remember that the due date for filing your tax return is coming up soon. Be sure to avoid extra penalties by getting your filing in on time.
You can do that by creating a go-to tax filing checklist to follow, like this one:
- Gather up all of your income statements, including W-2s and 1099s.
- Review each income statement for accuracy.
- List each of your deductible expenses and verify that you have documentation, such as receipts, to back-up your deductions.
- Review your contributions to tax-advantaged retirement accounts for the previous year.
- Decide whether to file your return yourself using a tax software program or pay a tax pro to do it for you.
- Give yourself a cushion of a few days to a week before the filing deadline to finalize your return and mark the final filing date on your calendar.