How to File an Extension (And Whether You Need to)

Kiplinger

The deadline matters only if you owe money. But you still have to file to collect a refund -- and some taxpayers are running out of time.

What are you waiting for? The April 18 deadline -- yes, you get the weekend -- for filing your 2010 federal income-tax return is fast approaching. If you haven't tackled this annual chore yet, your next step will depend on how complicated your tax situation is and whether you owe money.

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If your situation is relatively simple -- say, you and your spouse each have a Form W-2 from your employers and a handful of forms from your bank, broker and mortgage lender -- you still have time to get the job done if you're willing to tackle your tax return by yourself. Tax-preparation software, such as TurboTax, TaxAct and a variety of other programs, is easy to use. Just answer the interview-style questions about your income and expenses, and the programs will populate the appropriate tax forms with your answers and do all the math. Nearly 100 million taxpayers prepared and filed their taxes electronically last year. That means e-filing is now the norm.

And if your income is $58,000 or less -- which accounts for about 70% of all taxpayers -- you qualify to use free tax-preparation and filing software at www.irs.gov/freefile.

File for an Extension

If your tax situation is more complicated, perhaps because of an extensive investment portfolio, stock options, rental property or a small business, you may need a professional preparer that specializes in the type of tax help you need. But if you don't have a tax pro lined up already, it's probably too late to find one in time to meet the April 18 filing deadline. So do yourself a favor and file Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return." You can request the extension online, by phone or by mail.

An extension will delay the due date for your completed return until October 17, 2011 -- but it doesn't delay the deadline for your payment. Estimate what you owe, and send it to the IRS along with your request for an extension.

What if you don't have a clue what you owe?

You may be able to take advantage of a safe-harbor rule that exempts you from an underpayment penalty if the amount of your 2010 taxes paid to date equals at least 100% of what you paid in 2009 (110% if your 2010 adjusted gross income was more than $150,000). If you're covered by the safe-harbor rule, you don't need to send a tax payment along with your extension request or worry about penalties, but interest will accrue (the current rate the IRS charges is 4%) if you owe money.

If you're not protected by the safe-harbor rule and you owe more than 10% of your tax bill when you file your extension, you'll start racking up underpayment penalties of 0.5% a month on the unpaid amount, up to 25% of the balance, plus interest. Still, that's a lot better than the consequences of failing to file altogether, which entails a more onerous penalty of 5% a month on the unpaid balance, up to 25%, until the return is filed. (Penalties apply only if you owe more than $1,000.)

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No Tax Due, No Penalty

If you don't owe additional tax with your return, you can basically ignore the April 18 deadline. The penalty for missing the deadline is a percentage of the tax owed with the return, so if you owe nothing, there's no penalty. But if you're in this boat, you should file as soon as possible to retrieve your refund.

If you have a refund coming and decide to ignore the April 18 deadline, don't dawdle too long. You have three years from the due date to file and claim your refund. The IRS says it has $1.1 billion in unclaimed refunds due to 1.1 million people who didn't file a tax return for 2007. To collect, you must file a 2007 return by April 18, 2010. If you don't, the money is gone forever. And in order to claim a refund for 2007, you have to file returns for 2008 and 2009, too. There is no penalty for filing a late return qualifying for a refund.

And What If You Can't Pay?

What if you owe money to the IRS but don't have the cash to pay the bill? Don't panic, but don't ignore the problem, either. File your 2010 tax return by the April 18, 2011, deadline, even if you can't pay the full amount you owe. The late-payment penalty is 0.5% per month of the unpaid amount, up to 25% of the balance. Still, that's a lot better than the failing-to-file penalty of 5% a month.

Pay as much of your tax bill as you can when you file your return, to reduce the penalties and interest that will continue to accrue until the balance is paid in full. Then wait for the IRS to send you a bill for the balance. That should take about 45 days and give you some time to come up with some or all of the cash.

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Minimize the damage. Interest and penalties can add up quickly. Say you owe $9,000 in taxes on your 2010 return. If you file your return by the April 18 deadline and send no money -- but pay your tax debt in full three months later -- you'll owe $9,658, including interest and late-payment penalties, according to estimates calculated by Jackson Hewitt Tax Services.

But if you delay filing your taxes until you come up with the money, and file and pay your taxes three months after the due date, your tax bill will balloon to $12,452, including interest (currently 4% on unpaid balances compounded daily) and failure-to-file penalties.

If you act before April 18, you can file Form 4868 to delay your tax-filing deadline until October 17. But it won't delay the deadline for paying your taxes. Interest will continue to accrue on the unpaid balance. However, the late-payment penalty does not apply during the six-month extension period if you paid at least 90% of your actual tax liability before the original April 18 due date and pay the balance when you file the return.

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