Time’s Almost Up for Automatic Tax Extensions

Tax extensions

Tax extensionsEven though the U.S. government – including the IRS – remains shut down today, there are still several important tax deadlines looming for individual and small business taxpayers. Penalties and interest begin to accrue on the due date, and there is no provision in the tax code to waive those penalties or interest because of a government shutdown, so don’t expect the IRS to ignore late payments.

Tuesday, October 15 marks the expiration of the automatic six-month filing extension granted to taxpayers who requested the tax filing extension for their 2012 tax returns. Taxpayers who filed IRS Form 4868 by April 15, 2013 were granted an automatic tax extension until October 15, 2013 to complete and file their tax return forms.

Taxpayers who filed Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return electronically should have received an email confirmation of the filing for the automatic extension. Those who mailed in Form 4868 probably received no notice from the IRS that the form was received.

In late September, the IRS said that 11 million taxpayers who received automatic extensions in April still had not filed their 2012 tax returns.  No one knows, of course, how many of them have yet to file their returns, but it’s likely to be a large number.

Tax extensions give taxpayers time to prepare a completely accurate tax return, but the IRS won’t wait until October for payment. Instead, taxpayers are required to estimate the taxes that are owed and pay that amount in full by the due date in April.

Then, once all of the paperwork is finished and the completed return is filed, if the amount owed is lower than the amount paid, you’ll get a refund.  If you owe more than you estimated, you must pay the additional amount to the IRS when you file your completed return.

If you didn’t pay your income taxes in April, the IRS will most likely assess a late payment penalty and interest charges which accumulate each month that your taxes go unpaid. Tax extensions don’t avoid penalties and interest, and neither does the current government shutdown.

The “late payment penalty” is usually 0.5% of the unpaid taxes, assessed on a monthly basis. For example, if you have $2,000.00 in unpaid taxes, the IRS may charge you $10.00 per month as a late payment penalty: $2,000.00 x 0.5% = $10.00

If you haven’t paid your balance by the time your tax return is due, you will begin to accumulate interest on your outstanding balance. This interest is typically assessed at 5.0% annually on your balance.

For example, taxpayers who filed tax extensions but did not pay taxes due will be charged 5.0% interest annually (or 0.4% interest monthly) on the outstanding balance. Using the example of a $2,000 tax bill, with $10 per months in late payment penalties, plus monthly interest charges of 0.4% ($8.00 per month in interest: $2,000.00 x 0.4% = $8.00), then the total due on October 15 would be $2,108.00 – the original $2,000 amount plus $60 in late payment penalties and $48 in interest.

The key dates for October include:

October 15

  • Personal returns that received an automatic six-month extension must be filed and any tax, interest, and penalties due must be paid.
  • Electing large partnerships that received an additional six-month extension must file their Forms 1065-B today.
  • If the monthly deposit rule applies to your business, employers must deposit the tax for payments in September for social security, Medicare, withheld income tax, and nonpayroll withholding.

October 31

  • The third quarter Form 941 (Employer’s Quarterly Federal Tax Return) is due and any undeposited tax must be deposited. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.
  • If a small business has employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through September exceeds $500.

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