In the midst of the coronavirus, the Internal Revenue Service (IRS) extended the due date for 2019 federal tax returns from April 15 to July 15, 2020, but if you need even more time, you can request an extension until October 15, 2020. Here’s what you need to know about extensions.
How to Request a Tax Extension
To request an extension, you need to file form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return ) or ask your accountant to request an extension for you.
When you make the request, you simply provide your name, address, social security number, and the amount of tax you anticipate owing. You can also send a payment with your extension request if you like.
Payment Due Dates on Extended Tax Returns
An extension only gives you extra time to file your return. It does not extend your payment due date. When you request an extension, your tax return is due on October 15, but your tax payment is still due on July 15.
Even if you can’t pay right away, you should still file by your due date. The penalties for not filing are much worse than the penalties for not paying.
Benefits of Requesting an Extension
The main benefit of requesting an extension is that you get extra time to file your tax return. If you don’t have all your paperwork ready or just don’t have the time to file early in the year, an extension buys you the extra time you need. It also helps you avoid late filing penalties.
Late Filing Penalties Versus Late Payment Penalties
The late filing penalty is 5% of your tax due for every month you’re late, up to 25%. To explain, imagine that your tax return was due on July 15, 2020 and you owed $10,000, but you forgot to request an extension and you didn’t file until September 15, 2020.
Because your return is two months late, you incur a 10% failure-to-file penalty of $1,000. By requesting an extension, you avoid that penalty.
In contrast, the penalty for a late payment is only 0.5% of your tax owed per month. To continue with the above example, say you requested an extension, and you filed and paid your tax bill on September 15, 2020.
At that point, your payment is two months late so you owe 0.5% of the balance for each month late, making your penalty $100. This is much smaller than the failure to file penalty. Note that you may also have to pay interest on past due balances, but the amount is relatively negligible.
Should You Request an Extension?
If you need extra time to file your return, don’t hesitate to request an extension, but remember an extension only gives you extra time to file. It does not change your tax payment due date.
Need help dealing with a tax return extension? Want to streamline taxes and accounting for next year? Then, contact us today.
At My Online Accountant, we focus on the numbers so you can focus on making the most of your investment properties.
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