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Not ready for April 15? A tax extension may help

With about three weeks left to file your taxes, some taxpayers may be mulling whether it's a good idea to ask for an extension.

It's not an uncommon strategy, with the Internal Revenue Service noting that 12 million taxpayers asked for an additional six months to file last year, or roughly 8 percent of all the returns the government agency received.

7 oddball tax deductions
7 oddball tax deductions

Asking for an extension is relatively easy, with the IRS estimating that the paperwork takes just minutes to fill out. By requesting an extension, taxpayers have until Oct. 15 to file their returns. The upsides include receiving an extra six months to get one's tax documents in order, and it also allows Americans to file after April 15 without incurring a late-filing penalty.

So what's the catch? There are a few issues that taxpayers need to be aware of before they file for an extension, such as the not-so-inconsequential issue of tax payments.

The first step in filing for an extension is to fill out Form 4868 by April 15, which provides individuals with an automatic extra six months to file their paperwork. Taxpayers aren't asked for a reason for the extension, and it's not considered a red flag for an audit.

But there is one big catch for taxpayers who expect to owe the federal government: Payments are still due by April 15. That means that even if you don't have your paperwork together by mid-April, you need to have a reasonable estimate on what you owe the taxman.

Payment on 2014 taxes will need to be postmarked by April 15, along with Form 4868. Taxpayers can also pay their estimated tax payment with a credit card online or on the phone.

There are a few pitfalls to be aware of when approximating payments. If the IRS believes your estimate isn't in the ballpark, the agency can disallow the tax extension and slap on a late-filing penalty, according to Turbo Tax. And if the estimate turns out to be less than 90 percent of the tax you owe, the IRS will tack on interest to the outstanding amount.

Still, the interest rate for underestimating a payment is far less than the late-filing penalty that would kick in by failing to file the extension or returns by April 15, according to the IRS.

The late-filing penalty will set taxpayers back by 5 percent per month on their unpaid balance. For taxpayers who file an extension but underestimate their payment, the interest rate is about 0.5 percent per month on the amount that's still owed to the IRS, according to the agency.

Given that taxpayers are still required to pay their owed taxes by April 15, some might wonder what the advantage is for filing for an extension. Some taxpayers have complications due to K-1s, tax forms distributed by partnerships and trusts, which are notorious for arriving in late March or even after the April 15 deadline.

Regardless of the reason for filing an extension with the IRS, taxpayers should also investigate their state requirements for extensions. Each state has its own requirements, but, like the IRS, they also require taxpayers to make an estimated payment by April 15, according to TurboTax.

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