It is important for taxpayers to understand that a tax return extension is an extension of time to file your income tax return and not an extension of time to pay the tax. Extensions are generally needed when information necessary to file a complete and accurate tax return is not available until after the filing deadline. This is an all too common occurrence for partners and shareholders in flow-thru entities like LLCs, Partnerships, and S-Corporations who receive their K-1 after April 15th.
Two Ways to Receive an Automatic 6 Month Extension of Time to File
1-File Form 4868 Application for Automatic Extension of Time. This form is easily generated using any tax preparation software. Taxpayers without access to tax software may find this form on the IRS website by searching “4868” or “Extension.” Form 4868 may be filed both electronically or physically by mailing the form to the IRS (use the address indicated per the instructions).
2-MAKE A PAYMENT. Individual taxpayers will be granted a 6-month extension of time to file by making an extension payment online using IRS Direct Pay. In order for a taxpayer to be granted the extension, the taxpayer must indicate the reason for payment is an extension. See screenshot below:
Beware of Trap! Remember, an extension is an extension of time to file your tax return, not to pay the tax! Therefore taxpayers need to estimate the amount of tax that will be owed and submit payment along with the extension. TRAP- The IRS can VOID your extension! If the IRS determines taxpayer’s estimate was not reasonable the filed extension will be voided (as if the extension was never filed). If this happens taxpayer will be subject to the failure to file penalty which is 5% of the unpaid tax a month for every month the tax return is not filed not to exceed 25%.
EXAMPLE: Joe the plumber is self-employed and has not been making estimated tax payments throughout the year. Come tax filing time, Joe owes $40,000 in income taxes to the IRS. Joe currently does not have the money and chooses to file an extension instead of filing his tax return. Joe files for an automatic 6-month extension with the IRS and does not make a payment with the extension.
The IRS will surely VOID this extension. Joe will be hit with a failure to file penalty (IRC §6651) of 5% a month for every month tax return is not filed not to exceed 25%. The worst part is that Joe thinks everything is ok and is unaware that his extension has been voided. In this scenario, the taxpayer would be hit with a failure to file penalty not to exceed $10,000.
PROTIP: If you do not have the money to pay the amount due with your tax return, you are better off filling the tax return and entering into an installment agreement with the IRS than filing for an extension without making an extension payment.
Peter Alizio is a CPA and Tax Attorney. When he is not solving IRS and NYS tax problems he likes football and playing amateur chef. He also enjoys meeting new people, preferably over coffee, whiskey or cigars.