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EXTENSIONS: A GOOD THING

April 11, 2005

Now that you have squandered your weekend enjoying the nice weather instead of digging through your checkbook, you may be wondering, "what's with this April 15 stuff anyway?" Excellent question!

Tax returns are due April 15, but that deadline can be automatically kicked back to August 15; another extension is usually available to push it back to October.

This doesn't mean you can just blow off the deadline entirely. You have to at least have a clue what your taxes are for the year to safely extend. Some extension basics:

HOW DO EXTENSIONS WORK? WHAT DOES IT COST?

Federal 1040s can be extended by filing Form 4868 by April 15. We can also file extensions electronically. The government charges no special fee for filing the extension.

The extension puts off the filing due date until August 15. An extension DOES NOT extend the time to pay any tax owed. If you fail to pay in at least 90% of your total tax for the year by April 15, you will be charged a 1/2% late payment penalty for taxes paid after April 15. The late payment penalty increases by 1/2% whenever another month goes by; for example, if you make your late payment on May 17, the total penalty is 1%. Interest is also charged on the underpayment at the federal underpayment rate, currently 6%.

IF I HAVE TO PAY, WHY BOTHER EXTENDING?

If you fail to even extend a return, the harsh "failure to file" penalty applies when you do pay your tax. This penalty is 5% of any underpayment once the return is late, and an additional 5% for each additional month the return is late. For example, a payment with a non-extended return filed on April 20 is subject to the 5% penalty; if the payment is instead made on May 20, the penalty is 10%. Interest is also charged on any amount owed.

If the IRS concludes that you didn't make a reasonable stab at estimating your tax liability, they can say the extension was invalid, sticking you with the higher non-filer penalty.

IF I EXTEND MY RETURN, WILL I GET AUDITED?

We are aware of no evidence that a return becomes any more or less likely to be examined if it is extended. The IRS generally has three years to assess any underpayment on an audit; if a return is extended, the IRS has until three years after the extended due date to make any examination adjustments.

For what it's worth, I've extended my returns for at least the last 15 years without any complaints from the IRS (knock wood). Had I not filed by the extended deadline, though, I'm sure they would have said something.

WHAT ABOUT IOWA?

Iowa returns can be extended for six months from the April 30 due date without filing any form as long as 90% of the tax for the year has been paid. Interest will accrue on any underpayment at 10%.

The stakes are higher when estimating the Iowa tax due with an extension. Iowa imposes its "failure to file" penalty if 90% of the tax is not paid in; this penalty is 10% of any amount not paid by the due date. This is more severe than the 1/2% monthly "failure to pay" penalty that the federal government imposes under the same circumstances.

WHERE CAN I LEARN MORE?

The IRS has a new web page devoted to extensions here.

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