(MoneyWatch) If you need more time to get your taxes done right, then file a Form 4868, Application for Automatic Extension for Time to File U.S. Individual Income Tax Returns. If you don't file a tax return or at least an extension by the April 17 deadline, then you'll owe IRS penalties and interest.
The penalty for not filing your tax return or an extension on time is a stiff 5 percent per month up to a maximum of 25 percent of the amount of tax due on the late-filed return.
Filing an extension gives you an automatic extension to file your final 2011 tax return until Oct. 17, 2012. But filing an extension does NOT give you an extension to pay the taxes you owe. You'll need to also make a reasonable estimate of taxes you owe and submit a payment with the Form 4868. To avoid a late payment penalty, you have to have paid (from withholding, estimated tax payments and what you pay with the extension) at least 90 percent of what you owe, or have paid 100 percent of your 2010 tax liability. If you want to avoid paying any additional interest for paying late, you have to pay the full amount of the tax liability owed. The current IRS interest rate for late payments is 4%, so it's not that big a deal.
It's a good idea to file an extension if you need more time to do a thorough job preparing a tax return. Especially if in 2011 you had to deal with a lot of new tax issues. Here are a few reasons why filing an extension is a good idea:
- With so many new tax credits available, you'll want more time to do your research and make sure you are taking advantage of every credit you qualify for.
- If you had income from special situations - sale of property, exercise of stock options or , etc. - and you need more time to gather your records and get advice as to how to report.
- If your tax preparer is really bogged down, ask him to file an extension now. This will give him more time to finish your return later when he can give it his full attention and do a more thorough job.
- Many financial institutions are still sending corrected forms 1099 with revised amounts for qualified dividends and foreign taxes. Taxpayers with investment income may want to file an extension if they typically receive a corrected form 1099.
Filing an extension is free. For your federal income tax return, you can log onto the IRS Free File site and use the service on that site. Also, most states will have this feature available on their web sites.
And if you do file your federal tax returns on extension, then you'll also need to file an extension for your state tax return as well. And don't worry - filing for an extension does not make your return any more likely to be selected for an IRS audit.