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For the roughly 150 million of you who file income tax returns with the federal government each year, relish in the fact that you're about as far away as possible from Tax Day (traditionally April 15) as you can get!
However, millions of other Americans are nearing crunch time. Though we don't have the data as of yet for the 2015 tax year, since the Internal Revenue Service released tax filing data after the fact, nearly 13 million taxpayers chose to file extensions (Form 4868) in 2014 for their 2013 tax returns. This is important because the Oct. 17, 2016 deadline for people who filed federal tax extensions for the 2015 tax year is rapidly approaching.
In some respects, filing for a tax extension makes a lot of sense. For example, if you have missing or inaccurate information, then you simply don't have the ability to file a complete tax return on-time. TurboTax notes that it's not completely unusual to have Form 1099 or a Schedule K-1 arrive late and foul up your plans to file your taxes by the April deadline.
Two other reasons why some people may consider extensions are if they'll be out of town on business or a vacation, or if major life events get in the way and they simply don't have time to complete their federal income tax return before the April deadline rolls around. Whatever the reason, the IRS allows taxpayers to take advantage of extensions if they need them -- and apparently quite a few do.
What you need to know if you filed a federal income tax extension
But as we inch closer to the October 2016 tax extension deadline, there are three things these millions of tax extension filers need to know.
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1. It's time to pay your penalties and interest
One realization you may have had when filing your tax extension was that an extension doesn't exempt you from paying the federal government what you believe you'll owe. People filing for a tax extension are still required to pay 90% of what they believe they'll owe by the April Tax Day deadline.
If you failed to pay the full amount owed to the IRS by the April tax deadline, you'll more than likely owe penalties and interest as well. Failing to pay the full balance of what you owe can result in a 0.5% penalty per month, with a maximum penalty that works out to 25% of what you owe. Additionally, interest is charged (the federal short-term rate plus 3%) on your remaining balance, with this interest rate subject to change on a quarterly basis.
But fail to miss the October tax extension deadline and you could really be hurting. The penalty for failing to file your tax return or tax extension can be 10 times as much (5% per month) as simply failing to pay (0.5% per month). When combined, the maximum penalty for failure to pay and file could reach as high as 47.5% of your total tax bill (22.5% for late filing and 25% for late payment).
Long story short: be prepared to open your wallet if you've filed for an extension and failed to pay enough of your tax back in April.
Image source: Getty Images.
2. The IRS would prefer to work with you if you can't pay
The second thing you'll want to know if you've filed a tax extension is that if you can't afford to pay the remainder that's owed, the smartest thing you can do is be proactive and contact the IRS in an attempt to work out an installment agreement. Just like a lender that's owed money, the IRS would rather work with you to collect your balance in full than have to penalize you and try to collect by other means.
According to SmartAsset, qualifying for an installment agreement with the IRS is fairly straightforward. As long as you don't owe more than $50,000 and you've remained up-to-date on your tax filing, then you'll probably be able to work out a payment plan with the IRS over a 72-month period.
Being proactive and upfront with the IRS over your inability to pay also has an ancillary benefit: you may be able to get some, or all, of your penalties waved. Furthermore, if you haven't had any recent tax trouble over the past three years and you proactively approach the IRS for help, they may even be willing to reduce the amount that you owe.
Image source: U.S. Army.
3. You may be able to put your tax filing off even further
Finally, if you filed a tax extension, consider that a select few circumstances could allow you to postpone your tax deadline even further.
For example, if you're in the military and stationed abroad, or you're in a combat zone, you may qualify for certain automatic exemptions that go well beyond the October tax extension deadline. Typically, members of the armed forces are granted an extension of 180 days from their last day of service in a combat zone. In certain cases, additional days may be tacked on for the period prior to Tax Day that military members were deployed. In short, the extension can vary from case to case, but members of the military in combat or stationed abroad usually have a viable reason to extend their tax filing.
Another instance would be U.S. citizens who are living abroad. According to the IRS, U.S. citizens living abroad who also have a main place of business outside of the U.S. or Puerto Rico are allowed an automatic extension of two months to file their return and pay their federal income taxes.
With Tax Day version 2.0 approaching, make sure you understand your options.
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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
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