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Filing Taxes Can Wait, Your Tax Bill Won’t

If the countdown till April has you feeling flustered, you may decide to file for a tax extension. The IRS estimates that about 10.6 million taxpayers will file for an automatic six-month extension for the 2010 season, up slightly from last year. But before you fill out that Form 4868, consider a few factors that could affect your decision.

An extension gives you more time to file, not to pay. “The majority of people think they want to file [an extension] because they owe, but that’s not a legitimate reason,” says Elaine Smith, a tax adviser at H&R Block. If that check to the IRS isn’t postmarked by April 18, 2011, you will owe interest and most likely some nasty penalties.

The IRS won’t penalize you for an extension if you’re owed a refund, as The Tax Blog recently reported.  However, if you think you owe money “estimate the amount and round up” when calculating how much to pay, says Melissa Labant, a CPA on the tax staff at the American Institute of CPAs. If you’re self-employed and you make quarterly estimates, look at last year’s books to make a good-faith approximation of what you owe. If you overpay, you can always get money back as a refund, or apply the excess to future quarterly estimates. However, underpayment will result in interest on the amount due from the due date.

Filing for an extension has gotten easier given the option to e-file your Form 4868. What’s more, filers now get an automatic six-month extension on federal taxes. (Before tax year 2005 filers could apply for an initial four-month extension and had to separately file for another two months, if necessary.)

Nevertheless, experts say that while many clients inquire about extensions, fewer than 5% of total returns in 2009 used them. “Typically people want to file and be done with it, especially if you’re getting a refund,” says Labant. About 77% of filers received refunds in tax year 2009, according to the IRS.

Procrastinators don’t entirely comprise that group of extension filers. Perhaps you gave birth to triplets at the end of March, or you’re a member of the overseas military. Most taxpayers who file for an extension, though, do so because they’re missing information necessary to complete their returns. For instance, a partner in a partnership or member of an S-corporation may be waiting for a Form K-1, which reports his share of the company’s profits or losses.

Before you decide to file for an extension, weigh the following tips:

  • The Form 4868 grants an extension for your federal taxes. Forty-two states have income tax and, it seems, just as many rules, says H&R Block’s Smith. Some states and cities will grant an automatic extension with the Form 4868 and others won’t. “Look at all the different taxing entities in your area and ask, ‘Do they allow extensions?’”
  • If you wait until the end of March to provide your tax preparer the necessary documents to file your return, he may suggest filing for an extension. Heed that advice, says AICPA’s Labant. Just because you file for an extension doesn’t mean you have to wait until October to complete your return. Your accountant may want an extra week or two to review your materials, in which case your return would be signed, sealed and delivered as early as May.
  • While e-filing your Form 4868 is free, some tax preparers charge a fee to file the form depending on when you file. H&R Block charges $49 to file an extension for you, though the company will offer that service for free starting April 1.

Readers, do you think filing for an extension makes life easier?  Or does it just delay the inevitable paperwork?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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