Some people have asked me whether they should file a tax extension (tax form 4868) if they can't afford to pay their tax bill. Unfortunately, being unable to pay your taxes isn't a reason the government accepts to file an extension. Neither is procrastination.
The only reason I can think of for filing an extension is if there's a delay in receiving one of your tax documents that will materially alter your taxable income. The most common form that's sometimes late is the K-1 form from a business partnership, S corp, or trust and estate beneficiary. You should always be able to receive your 1099s and W2s on time.
The K-1 form from my venture debt investment won't be coming out until the summer. As a result, I'm forced to file an extension because there's several thousand dollars in pass through income I'll receive, which requires tax payments. I'm owed refunds of about $1,000 from both Federal and California, so waiting several more months to file isn't a big deal. If I owed, then I'd still have to pay at least 90% of what I think I owe to avoid penalties. Extension filers have until October 15 to submit their returns.
What If You Can't Pay All Your Taxes By Due Date?
Check out these four tips the IRS provides if you can't pay your taxes by due date. These words are verbatim from the IRS's website: www.irs.gov/uac/Newsroom/Four-Tips-If-You-Cant-Pay-Your-Taxes-on-Time
1) File on time and pay as much as you can. File on time to avoid a late filing penalty. Pay as much as you can to reduce interest charges and a late payment penalty. You can pay online, by phone, or by check or money order.
2) Get a loan or use a credit card to pay your tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. (WTF?)
3) Use the Online Payment Agreement tool. You don’t need to wait for IRS to send you a bill before you ask for a payment plan. The best way is to use the Online Payment Agreement tool on IRS.gov. You can also file Form 9465, Installment Agreement Request, with your tax return. You can even set up a direct debit agreement. With this type of payment plan, you won’t have to write a check and mail it on time each month. It also means you won’t miss payments that could lead to more penalties.
4) Don’t ignore a tax bill. If you get a bill, don’t ignore it. The IRS may take collection action if you ignore the bill. Contact the IRS right away to talk about your options. If you are suffering a financial hardship, the IRS will work with you.
In short, remember to file on time. Pay as much as you can by the tax deadline and pay the rest as soon as you can. Find out more about the IRS collection process on IRS.gov.
The bottom line: The IRS wants your money regardless of what situation you are in! It's pretty amazing they openly suggest getting into credit card debt to pay your taxes. Credit card interest rates average around 15%. If the IRS is penalizing you by more than 15% a year for not paying your taxes, they are taking you to the woodshed and beating you to a pulp! There is no forgiveness, only punishment. Pay as much as you can with your tax return submission. The IRS will notify you later regarding what you still owe plus interest and penalty charges.
How Do You File A Tax Extension?
1. Electronically file (e-file) Tax Form 4868 online
2. File a paper Tax Form 4868 by mail
3. Pay all or part of your income tax due (what you expect to owe) with your credit card or debit card using the Electronic Federal Tax Payment System (EFTPS)
I filed a tax extension the easy way by clicking the option to file an extension with my online tax software. The software asks you for your filing status (single, married, etc), personal information (name, address, business name, etc), your estimated tax liability and your total taxes paid, your tax liability results, the state you want to file an extension, and whether you want to e-file or paper file your extension.
The extension submission process took just three minutes. Within 15 minutes after submission, I got an email from the IRS confirming receipt and extension approval. Below is a snapshot of one of the most crucial pages of information. So long as your tax payments (step 2) are greater than your tax liability (step 1), you don't have to send a check before filing your final return.
More Investments More Complications
Filing an extension online with tax software is very easy. But if I didn't invest in this venture debt investment or any private investments for that matter, I would never have to file an extension nor would I have to spend time inputting my K-1 data. More money, more complications.
There's something to be said about keeping your investments simple. I really like the idea of having a digital wealth advisor manage some of my money for a low fee and automatically conduct tax loss harvesting for me.
A long term, value focused public equity portfolio with hardly any turnover would be perfect as there would then be less tax entries to fill and less taxes to pay! That said, I think there's good private investment opportunities where I'm willing to allocate at least 20% of my investable assets.
Updated for 2021 and beyond.