Tax extensions give you six extra months to file your tax return. Instead of wrapping up all your paperwork by April 15, you have until Oct. 15 -- provided you've submitted the proper form and your request for an extension is approved.
A tax extension makes sense in certain situations -- for example, if you lost some of your tax paperwork, and you are waiting on copies -- but there many misconceptions exist about what tax extensions do and don't do. These misunderstandings can cost you if you get confused. Here are four of the most common myths about tax extensions, and the truth about tax extensions.
1. Filing a tax extension is difficult, and only some people qualify.
Filing a federal tax extension is as simple as completing Form 4868 and submitting it to the Internal Revenue System (IRS). Just fill out some basic personal information and estimate your outstanding tax liability for the year based on your personal records and the tax forms you've received from your employer. Owing taxes is usually only a concern for the self-employed. If you work for an employer, it should take taxes out of your paychecks and you probably won't owe the government anything. Then, submit the form electronically through a tax software program or mail it in. As long as you've filled out the form correctly and you submit it by April 15, you'll probably qualify for an extension. There's no need to explain why you want it or restrictions on who may request an extension.
But this doesn't mean you can't be rejected. The government could deny your request if you fill out the form incorrectly, or if the information you entered doesn't match IRS records. If your tax extension request is denied, look over the form to ensure everything is accurate and reach out to the IRS if you have questions.
2. If I file a tax extension, I don't have to pay my taxes until October.
Truthfully, you're never required to pay your taxes by April 15, extension or no. But if you don't, the IRS will begin charging you interest on any outstanding balance. First, there's a 5% monthly failure-to-file penalty, with a maximum penalty of 25%, for those who don't file a return or an extension by April 15. Then, there's also a 0.5% monthly failure-to-pay penalty. This goes on until you pay back what you owe or until the penalty reaches 25% of your outstanding balance. If both penalties are in place, you'll pay a maximum 5% penalty per month and 25% overall.
A tax extension won't get you out of the failure-to-pay penalty, but it can eliminate the failure-to-file penalty. However, if you don't file your return by Oct. 15, the failure-to-file penalty will kick in then.
3. I'll probably get audited if I file a tax extension.
The fear of drawing unwanted attention from the IRS keeps many taxpayers from filing a tax extension, but this is not true. In fact, an extension could lower your risk of being audited. It gives you more time to look over your return and verify that everything is accurate. If you rush through your return so you can submit it by the April 15 deadline and you make a mistake, like transposing numbers or failing to report some income, that could bring the IRS to your door.
4. If I file an extension, I can't file my taxes before Oct. 15.
A tax extension simply gives you until Oct. 15 to file your return, but you don't need to wait that long. Once you've prepared your return, you can submit it at any time, even before the April 15 deadline. If you think there's a chance you may need an extension, it's best to request one just to be safe, but if you don't need to use it, then file your taxes during the regular tax season.
If you need extra time to prepare your tax return, an extension can be a lifesaver. But it's important to understand what it does and doesn't do so you don't run into any unexpected surprises.