The novel coronavirus, or COVID-19, is wreaking havoc on the stock market, upending the travel industry, and threatening disruption to our daily lives. And in the midst of all the chaos, it's easy to see how taxes could easily fall by the wayside, despite 2019 returns being due in just over a month.
So what happens if you or the person who does your taxes is forced into quarantine in the coming weeks, leaving you unable to complete your return on time? Or what if a change in schedule or routine (say, an extended school closure) throws you off your game and leaves you needing extra weeks to get your taxes done?
The good news is that you're not out of luck in this scenario, because you can get more time to complete your return. But whether that comes at a cost will depend on if you owe the IRS money or not.
How tax extensions work
When you need more time to complete your taxes, whether because of something as serious as a global health scare or as simple as sheer procrastination, all you need to do is fill out Form 4868, and the IRS will automatically grant you an extra six months to submit your return. You don't actually need an excuse for extending your personal filing deadline; you just need to make that request by the regular April 15 filing deadline.
That said, the only thing a tax extension will do is buy you extra time to submit your return to the IRS; it won't give you additional time to pay off any taxes you owe. Therefore, if you get an extension this year but have a tax bill on your hands, you'll need to pay that debt by April 15 or otherwise face a late payment penalty equal to 0.5% of your overdue taxes for each month or partial month they remain unpaid, up to a total of 25%.
Of course, that presents the classic Catch-22 situation: If you don't have time to complete your taxes by April 15, you won't know what you owe by April 15, and as such, you won't be in a position to know what to pay the IRS. It's a tricky spot to land in, so if that's the case, do your best to estimate what you think your tax bill might be, and pay that sum to the IRS by the regular filing deadline if you're able to. That way, if you're a little off and still wind up underpaying, the late payment penalty won't be as bad.
For example, say you run some numbers quickly and see that you owe the IRS $1,500. If you pay that sum by April 15 and then complete your return two months later and find that you really owed $2,000, you'll only face penalties on that extra $500.
Does it pay to get a tax extension?
If you're worried you'll be late with your taxes this year for any reason, then a tax extension absolutely makes sense. While it won't give you extra time to pay your tax bill, it will help you avoid a failure to file penalty, which comes into play if you owe the IRS money and don't submit a return or file for an extension by April 15. The failure to file penalty amounts to 5% of your unpaid tax bill for each month or partial month it remains outstanding, up to 25%. As you can see, that penalty is 10 times greater than the late payment penalty, at least initially, so if there's even a slight chance you'll be late with your taxes, go ahead and complete Form 4868. It could give you one less thing to worry about at a time when millions of Americans are overwhelmed by anxiety.