If you’re one of the roughly 15 million taxpayers who asked the Internal Revenue Service for an extension on filing your federal taxes in April, time’s almost up.
The federal tax extension deadline hits Oct. 15.
By submitting Form 4868 as of April 15, you gave yourself an extra six months to file your taxes. If you miss the October deadline, you’re likely to face a hefty penalty for failing to file.
More than one in 10 taxpayers asked for an extension this year, according to IRS statistics. Typically, taxpayers who asked for one needed more time to gather tax documents, or they had complicated taxes that required additional prep work. On top of that, taxpayers are grappling with the ins-and-outs of the new tax code, which President Donald Trump signed into law in December 2017.
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“There were a lot more extensions this year really due to the complexity of the Tax Cuts and Jobs Act,” the law that overhauled the tax code, says Bill Smith, managing director for CBIZ MHM’s National Tax Office.
He says, “In October, the key is to make sure you have your documents together. If you are missing anything, you will have to get the documents very quickly – you are running out of time.”
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Some taxpayers mistakenly believe the six-month extension provides an extra half-year to pay any taxes owed to the IRS, says Lisa Greene-Lewis, a CPA and tax expert with TurboTax.
“It’s a misconception, and we always emphasize that – it’s just an extension to file. The IRS wants you to pay 90% of what you owe” by April 15, she says.
Taxpayers who owe the IRS should have sent in an estimated payment before the regular tax deadline in the spring. If they didn’t – or low-balled what they owe the taxman – they could be on the hook for an underpayment penalty.
Dealing with an underpayment penalty
If your tax return shows you didn’t pay at least 90% of your tax bill by April 15, the IRS will sock you with a penalty of 0.5% per month on the unpaid amount until the rate reaches 25%, Greene-Lewis says. In other words, it could take about four years to hit that limit – unless you’ve failed to file your taxes, in which case you’ll face a higher penalty (see below.) The IRS charges interest on the amount you owe, although the rate varies by quarter.
Estimating correctly could be tricky for taxpayers who hadn’t gathered all their documents by the April deadline. Some tax preparers who wanted to help clients avoid the penalty may have overestimated what was owed by clients who filed extensions, Smith says.
“If you overpaid, you’ll get it back when we file the return,” he says. “That’s not the worst thing – the worst thing is there are people right now putting off filing or getting the info they need” to file before Oct. 15.
What happens if you miss the tax extension deadline?
Taxpayers who don’t file by Oct. 15 can face even higher penalties, tax experts say. The IRS will sock you with a “failure to file” penalty of 5% a month on your unpaid tax bill for up to five months, maxing out at 25%. If you face penalties for both underpayment (see above) and failure to file, the IRS will charge the higher fee of 5% until that penalty hits 25% after five months, but Smith notes that the underpayment penalty will continue to run at 0.5% per month beyond that.
If you owe either penalty, the IRS will calculate your fine after you file your return, says Eric Bronnenkant, head of tax for financial services firm Betterment.
“Pay what you owe, and let the IRS send you a bill for the amount of interest and penalties that you owe,” Bronnenkant says. “You’ll want to watch for that in the mail.”
If you can’t pay what you owe right away, the IRS will work out a payment plan. You can learn more about those here.
Last-minute retirement savings
Some business owners and self-employed workers may still be able to sock away retirement savings for the 2018 tax year if they have a simplified employee pension individual retirement account, also known as a SEP-IRA, which is geared toward these workers, tax experts say.
That’s because SEP-IRAs allow prior-year contributions as late as Oct. 15 – as long as an extension was filed. Traditional and Roth IRAs don’t enjoy this benefit, Bronnenkant says.
If you qualify for a SEP-IRA but don’t have one, you “can set one up today and fund that contribution” before the October deadline, he says. Because retirement contributions are tax deductible, this can help reduce your tax liability.
Tax penalty relief
Lastly, the IRS may waive penalties in certain cases, such as taxpayers who have suffered through a natural disaster. There’s also relief through the agency’s “first-time penalty abatement” program, CBIZ’s Smith says.
The IRS says this program is open to taxpayers who haven’t paid penalties in the previous three years, among other criteria.
Smith says, “If you have been a good boy or girl, you can get the penalty waved.”