How Does a Tax Return Extension Work?
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Introduction
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Almost everyone knows tax day is April 15, the date when tax returns must be postmarked to avoid late penalties. However, filing a complete tax return is not necessary, or even possible for everyone, which is why the IRS offers filing extensions. Extensions must be submitted by the regular tax deadline in order to be effective and are usually granted automatically if properly filed. The catch, however, is that except for businesses with special circumstances, the extension only applies to the return itself, not to any tax payments owed.
Who Can File?
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Any individual taxpayer required to file a tax return can apply for a tax extension by submitting Form 4868 to the IRS; a business submits Form 7004. Separate extension application forms exist for U.S. citizens and resident aliens traveling abroad, certain exempt organizations, employee investment plans and parties subject to estate tax. A business with net operating losses that can be applied to previous years may file for an extension on the basis that it expects its qualifying deductions to exceed its gross income -- this is done with Form 1138.
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Consequences of a Tax Extension
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A tax extension provides the applicant with an additional six months to file their required tax return documents, making October 15 the new deadline. If a tax refund is due, it will obviously be delayed if the return is filed after April 15. If a tax liability is owed to the government, interest is due on any amount not paid by the original April deadline. A late payment penalty is also assessed on any taxes not paid by April 15 if the outstanding amount is more than 10 percent of the total tax obligation. The penalties and interest can be as much 25 percent of the total unpaid liability. It may be advantageous, therefore, to submit an estimated tax payment prior to April 15 even if filing for an extension, ideally avoiding the penalty and interest. If ultimately, the payment was too large, a refund will be sent.
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