Getting a personal tax extension means you will have an additional 6 months to file your income tax return. This means your filing deadline moves from April 15 to October 15. On the other hand, if you’re requesting a business tax extension, your filing deadline will be extended either 5 or 6 months depending on the type of business entity. This means your filing deadline moves from April 15 or March 15, to September 15.
One of the most important things to remember is that your tax liability must still be paid by the original deadline (April 15 for most individuals, and March 15 for most businesses). A tax extension only extends the amount of TIME you are given to FILE your return.
You will be asked to provide an estimate of your Federal tax liability on the tax extension application — Form 4868 for individuals, or Form 7004 for businesses. You are expected to pay the full amount due on time. However, the IRS understands that it may be difficult to calculate the exact number (before you’ve fully prepared your return), and so you're exempted from the Late Filing Penalty as long as you pay at least 90% of the taxes owed by the original due date.
If you don’t pay your income tax liability on time, you will be subject to interest and penalties charged by the IRS. Therefore, you should try to pay as much as you can by the original deadline.
Here is a description of the fees that can apply to your unpaid taxes:
Also known as the “late filing penalty,” this fee may be assessed if you do not file your tax return (or tax extension application) by the proper due date. This deadline is April 15 for most individual taxpayers, and March 15 for most businesses.
If you don’t file on time and you owe tax, the total failure-to-file penalty is 5% of your unpaid tax. It is charged each month (or part of a month) that your tax return is overdue, up to a maximum of 5 months. If your tax return is over 60 days past due, the minimum penalty is either $135 or 100% of the tax owed, whichever is lower.
Also known as the “late payment penalty,” this fee may be assessed if you do not pay your income tax liability by the proper due date. This deadline is April 15 for most individual taxpayers, and March 15 for most businesses.
Even if you file a return, you will incur a late payment penalty if the full amount of tax owed is not paid on time. This penalty is 0.5% of your unpaid tax; charged each month (or part of a month) that your tax is overdue, up to a maximum of 25%. Note that the failure-to-pay penalty is raised to 1% if your tax remains unpaid 10 days after the IRS issues a “Notice of Intent to Levy.” Conversely, if you file by the proper deadline, the failure-to-pay penalty drops to 0.25% for each month there is an Installment Agreement in place.
In general, the IRS charges interest on any unpaid tax. Interest is assessed every day, from the original deadline of the tax return up until the date the tax is paid. The interest rates are determined quarterly and are based on daily compounding. The rate of interest for taxpayers (other than corporations) is the Federal short-term rate plus 3 percentage points. For the first quarter of 2015, the interest rate is 3% for underpayments of tax.
What If You Can't Pay Your Taxes On Time?
There are a few options for those who cannot pay their tax liability by the deadline. You can request to set up an “Installment Agreement” with the IRS, which would allow you to pay down your tax debt by making monthly payments. Tax Form 9465 (Installment Agreement Request) can be used to apply for an IRS payment plan. In some cases, the IRS will consider an “Offer in Compromise” which allows the taxpayer to pay less than what they owe, either through a lump sum payment or installment plan. Finally, certain taxpayers can request an extension of time to pay by filing Tax Form 1127 (Application for Extension of Time for Payment of Tax Due to Undue Hardship). Need help? Visit the IRS site for how to set up an IRS payment plan.
If you have any questions, feel free to contact the TaxExtension.com Support Team.
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