Missing the Tax Deadline? 5 Key Facts About Extensions

Source: Thinkstock

Source: Thinkstock

It only seems fair to classify the United States tax code as an abomination. Created by Congress in much the same way Frankenstein created his monster, and evolved over time like the streets of Boston, the Internal Revenue Service is burdened with task of managing this monstrosity, which Americans must interface with at least once a year. Collectively, Americans spend 6 billion hours each year — nearly 25 hours for each adult, or 3 million people working full-time for the year — dealing with taxes, most of it undoubtedly spent either in a blind rage or soul-crushing melancholy. This isn’t even the worst news.

The worst news is that it’s, well, getting worse. The U.S. tax code is already 4 million words long (this would fill nearly 74,000 standard-sized sheets of paper) and it’s getting longer pretty much every day. In 2012, the National Taxpayer Advocate reported that there had been approximately 4,680 changes to the tax code in the past 11 years, more than one per day.

This has made it pretty much impossible for policymakers and tax professionals — let alone the average citizen — to stay abreast of the current tax environment. Nearly 60 percent of Americans pay a professional to prepare their taxes for them, making the complexity of the tax code another kind of tax in and of itself. The National Taxpayer Advocate argues that the most serious problem facing taxpayers is the complexity of the tax code.

So it’s not that surprising that each year, more than 10 million individuals and 5.5 million businesses file for extensions. If you haven’t got your paperwork in yet (taxes are due April 15) here are a couple of things to keep in mind.

1. When is the extension application due?

If necessary, you can file for an extension of time to prepare your tax return. The extension must be filed when the paperwork is normally due, on April 15, and can grant you up to six additional months to get everything sorted out. The appropriate document to seek is Form 4868, the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. This close to the due date, it’s recommended that you file the form electronically. Special rules may apply if you live outside of the U.S. or are serving in a combat zone.

Over the past few years, the IRS has gotten much better at responding to requests for extension. While it used to take several days to hear back from the agency, now it can take only a few hours.

2. What does an extension actually do?

Keep in mind that filing for an extension does not waive your responsibility to actually pay your tax liability, estimated though it may be at this point. The extension only grants you more time to get your paperwork in. Failure to pay your tax liability on time, regardless of filing status, will result in a financial fee.

3. What are the financial penalties involved?

The penalty for failing to file at all is generally greater than simply failing to pay: typically 5 percent of unpaid taxes per month (up to a maximum of 25 percent) for a failure to file, and a penalty of 0.5 percent of unpaid taxes each month for a failure to pay.

Keep in mind that these penalties are calculated based on the amount of unpaid taxes still owed the IRS. This means that you can reduce the penalty by paying as much of your tax bill as possible on or before the due date. If you pay 90 percent or more of your tax bill on time, you may not face a penalty at all.

4. Filing late without an extension

If you fail to file for an extension with the IRS and pay your taxes more than 60 days after the due date — or, if you file for an extension and pay your taxes more than 60 days after the extended due date — you will face a financial penalty equal to either $135 or 100 percent of the unpaid tax, whichever is smaller.

5. Special circumstances

You may qualify for an exemption from the financial penalties associated with late filing if you are facing or have recently faced catastrophe in your life. For example, victims of severe storms in the South and Mideast U.S. in 2012 were granted leniency for filing their taxes that year, and more recently, the IRS has granted leniency to those affected by the Boston Marathon bombings.

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