Uh-oh. The tax-filing deadline is around the corner, and some people are rushing to prepare their tax returns at the last minute. A mistake can be costly, both in terms of penalties for underpaid taxes and time spent dealing with an audit. What can procrastinators do? Filing a tax extension may be an option, but there are a few details to know first.
Just a reminder, this year the tax deadline is the usual date of April 15. In recent years, it was pushed later because Washington, D.C., recognizes April 16 as Emancipation Day, when President Abraham Lincoln signed the Compensated Emancipation Act. In 2017, Tax Day was on April 18, and in 2018, it was on April 17. This year, however, it returns to the usual April 15.
Related: 50 Interesting and Fun Facts to Lighten Up Tax Time
There is no penalty for filing a late tax return if the IRS owes you a refund -- and that counts for up to three years after the missed filing date. Most people are eager to claim that money, though, and after three years the refund is forfeited.
Taxpayers who fail to file a tax return and pay taxes on time may have to pay two penalties. The failure-to-pay penalty is 0.5 percent of the unpaid taxes each month, up to 25 percent of the total unpaid taxes. (Blow off IRS attempts to collect and it could rise to 1 percent.) The failure-to-file penalty is 5 percent each month of the taxes owed, again up to 25 percent of the total unpaid taxes. But 5 percent is also the monthly maximum even if both penalties apply.
The failure-to-file penalty maxes out at 25 percent after five months, but the failure-to-pay penalty continues. Combined, the total penalty can add up to 47.5 percent of the unpaid tax. Taxpayers who do not file within 60 days of the deadline must pay a minimum failure-to-file penalty that is the lesser of $210 or 100 percent of the owed taxes. (Next year that figure rises to $215.)
In addition to the penalties for filing and paying late, the IRS might demand that interest be paid on the unpaid taxes owed. The rate is currently 5 percent, but it can change every three months.
People who opt for a tax extension have until Oct. 15 to file their tax returns. An extension can help avoid the failure-to-file penalty, which may be up to 10 times higher than the late-payment penalty. But the failure-to-pay penalty may still apply if the taxes go unpaid. To avoid it, make a payment of at least 100 percent of the previous year's tax liability or 90 percent of the current year's taxes owed in April and the remainder by Oct. 15.
Taxpayers who use online software to self-prepare and file taxes may be able to e-file an extension with the help of the software. There are Free File tax software options that offer this service to workers earning less than $66,000. An estimated tax payment can also be made online with the IRS' Direct Pay system, the Electronic Federal Tax Payment System, or using a credit or debit card. Otherwise, fill out and mail Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The form requires only a name, address, tax identification number, the estimated tax liability, and the amount being paid. It must be postmarked by April 15 this year.
Procrastinators are only one group that may want to consider filing for a tax extension. Business owners, investors, and in some cases regular employees may need this option because they didn't receive all the information or forms they need to file on time.
Although taxes are still due by the tax-filing deadline, some people may get a temporary pass on filing their returns. This includes people living abroad, military members serving in combat zones, and victims of some natural disasters. The IRS does not charge late-filing and late-payment penalties if reasonable cause can be shown for the delay, such as the death or serious illness of an immediate family member.
States that collect income tax have varying rules for filing an extension. For example, California says it "automatically" gives a six-month extension, but — similar to how federal extensions work — the amount owed in taxes still must be paid by the filing deadline.
If tax season typically sends you scurrying for receipts and other documents to use when you itemize deductions, this year may be a lot easier. The 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction to $12,000 for a single filer, $24,000 for married couples filing jointly, and $18,000 for someone filing as head of household (all slightly higher for the blind and elderly). That means, for many taxpayers, itemizing deductions won’t be worth the effort, which would simplify their tax-filing dramatically. That is, it could be a lot easier this year than in years past.
People who can't afford to pay at least 90 percent of their owed taxes can contact the IRS by phone, mail, or in person. Explain the situation and the IRS may offer to accept monthly installment payments or temporarily delay payment. If other options are not viable, the IRS may agree to settle the debt for a lesser amount. Applying for a settlement requires the taxpayer to pay a $186 fee and file Form 656: Offer in Compromise.
