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File an Extension to File and an Extension to Pay Your Taxes

20160414_091410Today’s post is for my U.S. readers only. Sorry.

Extension to File

The tax due date is fast approaching. This year your tax return or extension is due by Monday, April 18th. If all your paperwork has not arrived or you are unable to file your return by April 18th, file an automatic extension with Form 4868. Here are some tips about an extension to file:

  • Your extension should contain a reasonable estimate of your tax liability or the IRS can invalidate the extension. I have never seen the IRS invalidate an extension, but it is in the rulebook.
  • You are not required to make payment with an extension; the extension will still be valid.
  • Your tax return is due on October 17th this year with a valid extension.
  • You do not need to sign Form 4868. Your accountant can file an extension without signatures, too.
  • Here is a neat trick. Pay part or all of your estimated tax due with a credit or debit card or with EFTPS. If you do Form 4868 is not required. You are automatically deemed to have filed an extension.
  • You file for an extension with Form 2350 if you expect to qualify for the foreign earned income or housing exclusion. You will need to meet either the bona fide residence or physical presence test.
  • An extension to file only eliminates the late filing penalty (5% per month for a maximum of five months). Interest still accrues. If you paid at least 90% of your tax liability by the original due date (April 18th), the late payment penalty does not apply during the extension period.
  • In the case of a federally declared disaster, terrorist attack, or military action the IRS can extend the deadline. The IRS automatically abates interest in such cases during the extended period.
  • Military personnel have an automatic two-month extension if on duty outside the U.S. or Puerto Rico. If additional time is needed to file, Form 4868 can be filed by June 15th for an additional four-month extension.
  • A U.S. citizen or resident alien residing abroad also qualify for the automatic two-month extension

Extension to Pay

Most people are unaware of Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. Many tax professionals also are unaware of the limited opportunity to extend payment. Here are some key points about the extension to pay:

  • The extension to pay in NOT automatic.
  • Interest will still accrue during the extension period.
  • A statement must be attached to Form 1127 showing assets, liabilities, income and expenses for the three preceding months.
  • Form 1127 must be filed by the due date, excluding extensions.
  • The extension is for six months only.
  • You must show you are unable to borrow or sell assets without undue hardship.

Alternatives to Pay Late

If you owe additional tax with your timely filed tax return and intend to pay within 120 days there are no additional forms to file. The IRS will send letters demanding payment during this time; payment penalties and interest will continue to accrue.

If you need more than six months to pay your tax liability you should file an installment agreement. If your tax filings are all current and you owe less than $50,000, you can use the online payment system at the IRS.

Balances of less than $50,000 with a payment plan of six years or less (three years or less for balances of $10,000 or less) should be granted. The installment agreement is not automatic and can be filed at any time.

Form 9465 is available to apply for an installment agreement by mail. Form 433-F must be attached.

Installment agreements are not free. The current IRS fees for installment agreements are as follows:

  • Payment by check, money order, credit card or payroll deduction: $120.
  • Payment by electronic funds transfer: $52
  • If your income is below 250% of the poverty guidelines, file Form 13844 for a reduced fee of $43

Hope this helps you put the finishing touch on the current tax season. You can click on the banner below to file your extension. I’ll have a short post in the next few days on how to file a tax return with a missing or inaccurate W-2 or K-1. Then we can get back to the serious matter of wealth building. I have a powerful investment post slated for later this month. You will not want to miss it.