I’m sure it isn’t news to you that the tax deadline is quickly approaching. The good news is that you have a few extra days this year since April 15 is actually a holiday in Washington DC. So, April 18 is the end of the road for timely return filing this year.
If you don’t think you’ll meet the deadline on Monday, you can file an extension that will give you an extra six months until October 17. Though, there are some important things you should know before deciding an extension is the right call to make. An extension can be filed for any reason but you should really only request one if you’re missing necessary documents or you can’t file on time due to illness or some other major issue. Filing an extension each year simply because you just haven’t finished up your bookkeeping or haven’t gotten around to gathering up your documents isn’t a great idea.
Penalties for Late Filing
Let’s talk penalties. The late filing penalty is 5% of the balance due for each month or partial month the return is late, with a minimum penalty of $435 or 100% of the tax due, whichever is less. Filing an extension will mean you don’t have a late filing penalty but an extension is an extension to file and NOT an extension to pay.
If you will have a balance due on your return, you’ll need to pay at least 90% balance due with your extension or risk the assessment of a late payment penalty. The penalty is calculated at 0.5% of the outstanding tax due per month or partial month the tax is late and maxes out at 25%.
So, if you know your return will have a balance due, and you haven’t filed it because you can’t afford the payment, an extension won’t reduce the balance-due penalties. The IRS does offer options for various types of payment plans so you can tackle that balance over time. You will still have some late payment penalties assessed, but this is always a better option than not filing or paying anything at all. When talking about taxes, avoidance is always the most expensive option. Take a look at my blog post What To Do If You Can’t Pay Your Taxes for more information about installment plans.
No Penalties with Refund-Due Returns
On the other hand, if your return will have a refund, there won’t be any penalties assessed. However, it would be a good idea to file an extension anyway, just to minimize any funny business from the IRS when you do file.
It’s important to note here that the IRS is still extremely backlogged from being shut down for nearly 5 months in 2020. Return processing is taking more time than usual. You’ll want to get your return in line sooner rather than later to avoid having to wait even longer for your refund. The IRS is still working through processing millions of left over 2020 returns filed last year. The back of this line is not a place you want to be.
Options for Filing Extension
Should you file an extension? If you really won’t be able to get your return prepared and filed before midnight on Monday April 18, YES. The IRS website provides great information for how to file your extension either electronically or by mail. I definitely recommend using an electronic option if at all possible.
State Extensions Vary
Also, if you happen to live in a state with income tax filing requirements, you’ll need to check with your state’s taxing authority directly to determine if they require a separate extension. Some states grant automatic extensions if one has been filed with the IRS and some states do not.
Now, go get your return filed! The clock is ticking.