It’s getting to that point in the year when many tax filing procrastinators start to panic about the looming deadline. And if they think about just giving up and taking everything to a professional, they’ll find many professionals have to tell clients who haven’t submitted all of their info yet that their return won’t be completed before the April deadline. This leaves people with the choices of…
- do their best to do their own taxes and hope everything comes out OK,
- take their taxes to one of the “McDonalds’” of tax preparation…the big national chains with plenty of minimally-trained, low-paid part-timers who will enter everything in a computer for you and hope it comes out OK, OR
- file their taxes LATE and risk being carted off to federal prison!
Well this post is to let people know that filing your taxes late is not a one-way ticket to the slammer. In fact, in many cases simply filing an extension (more on that later, or skip to it now), and making sure you get your taxes right–even if a little late–is the wisest choice to make.
People make mistakes when they hurry and they’re rushed. It’s human nature. Whether you prepare your own taxes, or pay somebody to do it for you, chances are whoever is working on your return in early April may feel a little pressure to get things done by the deadline. I’m unaware of any studies addressing this issue, but I would consider it almost a certainty that tax returns filed in the first half of April are more likely to contain mistakes than returns filed at other times. And fixing those mistakes later can be costly and time-consuming.
If you have investments, it’s very common to receive “corrected” statements regarding your income in March or April, and sometimes even later. If you have complex investments–particularly if you receive investment income reported on a Schedule K-1–you might not want to rush out and file because there may be corrected statements coming your way.
Also, if you pay somebody to do your return, you’re probably more likely to get that person’s undivided attention, and maybe even a little bit better rate, if you’re willing to work with them outside of the busy part of tax filing season.
But what about penalties and keeping the IRS off your back? Well these are certainly legitimate concerns, but let me explain what the actual consequences of filing late are so you can make an informed choice.
Penalties for filing late are based on your tax due. If you have no tax due because you’re getting a refund, then there’s no penalty. I’ve known clients who wait a few years and then file several years all at once. (I don’t recommend that approach, but some people are comfortable with it.)
If you do owe tax, the penalties are actually fairly minor as long as you file an extension. You can avoid the penalty completely by filing an extension and making a payment with that extension. Of course, if you don’t have your return done, how are you supposed to know how much to pay, right? Well, there are tools you can use to estimate your tax liability (TaxCaster is a pretty user-friendly, free tool to use for this purpose). Aim high with your estimate, and then when you file you’ll get the excess back–often with interest!
If your estimate comes in low, but you filed the extension, the late payment penalty is only 0.5% of the amount of underpayment, per month the payment is late. So if you owe an extra $5000, and you file and pay only one month late, then your late payment penalty is a whopping $25. Two months late…$50. So even for a fairly significant tax liability, the late payment penalty is often less than the cost of a parking ticket. There’s interest as well. But at 3% annually, this is almost too low to worry about.
One other consideration is whether filing late raises “red flags” or guarantees an audit. I’ve never seen any evidence that people who file extensions and file a few months late face a higher audit risk. The only possible downside is the IRS has 3 years to audit your return from the filing deadline or when you actually file, whichever is later. So filing after the April deadline can extend the time the IRS has to review your return. But if the IRS hasn’t selected your return for audit in 3 years, I wouldn’t worry much about the chance they’ll choose you in that extra month or two.
Of course, if you owe taxes and fail to file an extension by the filing deadline, then the situation is very different. If you owe money and haven’t filed a return or extension, the late filing penalty is 5% per month…ten times the rate for simply paying late. This can add up fast. So if you don’t think you’re going to be able to file by the deadline, then just follow these instructions and get that extension filed (it’s easy).
Step by Step Instructions for Extension filing
If you’re not using software that offers free extensions, you can still easily file an extension for free. Unfortunately, the IRS does not offer e-filing of extensions directly, and instead relies on private companies to supply this service. As a result, there are too many e-filing options for any rational person to sift through, so paper-filing is generally much simpler and easier (and free except for the stamp). The only drawback is you’ll have to mail a check if you’re making a payment.
With that caveat, here’s how to file an extension in 10 very simple steps: (OK, one or two aren’t “very simple,” but we promise they’re not bad.)
- First, print out Form 4868 with instructions.
- Cut off the Form 4868 at the bottom of page 1.
- Fill in Lines 1-3 with your name, address, and Social Security Number(s).
- Estimate your tax liability in Line 4. OK, this one can be tricky. We recommend TaxCaster from TurboTax as a pretty user-friendly tool for doing this. Alternately, you can base your estimate on last year’s tax return. When all else fails, there’s no penalty for making a wild guess and being way wrong. (Although there is a very small penalty for underpayment, so guess high.)
- Enter your 2013 payment in Line 5. For most people, this means add up the amount in Box 2 of all W2’s you received. This may underestimate your payments, but it’s a reasonable start.
- Subtract Line 4 from Line 5 and enter it in Line 6…just like it says on the form :-)
- Enter any amount you’re paying on Line 7. This is optional. You don’t have to include a payment.
- Check the boxes on lines 8 & 9 if they apply to you. (Line 9 only applies to non-US citizens.)
- Put the form, along with a check if you’re making a payment, in an envelope.
- Use the table on the back page of the 4868 instructions to determine which address to use (based on your state of residence and whether you’re making a payment).Put a stamp on that envelope, seal it, and drop it in the mail. You’re done.
You now have until mid-October to file your return without any late filing penalties.