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.
Related: Audit Rates By Income: Your Chance Of Getting Audited By The IRS
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.
Related: How To Pay Little Or No Taxes For The Rest Of Your Life
Updated for 2021 and beyond.
Un-goddamed-believable but not at all surprising. Of course the IRS would suggest burying yourself in high interest debt in order to pay them! The IRS not only has zero interest in protecting Americans, they exist solely to subjugate ordinary Americans and keep people mired in financial slavery. Remember that you’re not supposed to obtain sustainable financial freedom; you’re supposed to shut your mouth, spend your life toiling for the politicians that make promises to their rich business and landowning friends, and love every f***ing minute of it. The IRS is one of the main tools–if not THE main one–to keep average Americans “in their place”. Telling someone to go into high interest debt to pay their taxes is reckless and dangerous financial advice that shows that the financial well-being of ordinary citizens is anathema and obscene to them; they should be putting people suffering from financial hardship on payment plans and forgiving tax debts in certain situations. High interest debt is what you take on to pay off the mafia don that’s kidnapped your daughter, not to pay off the government whose primary mandate is to ensure your freedom and safety.
If I gave that sort of financial advice to my customers, I’d lose my insurance license and my job. Of course, having a fiduciary responsibility to my customers, it’s my duty to look outfor their financial well-being. The IRS is only out to destroy your financial well-being.
Of course, I expect nothing less from a financial terrorist organization. And no, I’m not out of line for using the “T” word. More effort has been put into researching IRAs, 401k’s, and other ways to legally protect your money than on how to defeat the Nazis, the Soviets, and terrorists. I’d even say that the IRS presents more of a threat to you than ISIS. How many mainland Americans are killed each year by ISIS? How many Americans each year have their lives ruined by the IRS? At the risk of being the guy still quoting Bill Cosby, “The IRS comes for the regular people first.” At least ISIS is open about their intent to kill us; we’re supposed to see the IRS as another part of a Big friendly Government that just wants to help us.
I can smell the bullshit through my phone.
Sincerely,
ARB–Angry Retail Banker
The credit card one (#2) did surprise me a bit but I suppose it could be the case that the interest fees are less than what the IRS would assess in penalties?
Had to file an extension one year due to personal drama, but otherwise get them filed in a reasonable timeframe.
I used to be aggressive about filing as early as possible until BofA sent me an amended tax form in March that forced me to file an amended return. Now I do an initial run through TaxCut in February, but wait until late March to actually complete and file my taxes.
I’m a CPA. Like most CPAs I know I extend my own returns every single year on the evening of April 15th. And I file on the evening of October 15th. :).
One of the most common reasons for extending, besides late arriving K-1s is that many retirement plan contributions (eg, SEP-IRAs) also get their funding deadlines extended if the tax return is extended.
For a small business owner there is little you can do in October which saves on taxes for the prior year. A return on extension, enables a tax deduction for the prior year, for a contribution made in October.
Thanks Steven. Always good to have an expert in the house.
I contributed the max I could to by solo 401k in April for the year before. I guess it woulda been nice to spread out my contributions so it’s not one big hit.
LOL . good read.
A friend of mine recently moved to the US, followed by his family. He has to go for an extension, as his family is still waiting for their ITINs to arrive-expected in few more weeks
I have never filed for an extension. Usually I could get it done on time.
Recently, I read that you can work out a deal with the IRS to garnish your retirement account. When you do this, you won’t have to pay the 10% early withdrawal penalty. Sounds good if you have a lot of money in the IRA.
Hey Sam, looks like taxes are on the mind.
That seems extremely irresponsible of the IRS to recommend that. I understand that for some reasons individuals see the tax office as a less important creditor than others, but still, don’t screw them around.
Saying that, in Australia it’s much better to lodge on time and then create a payment plan with them. That way you aren’t getting lodgement penalties.
Tristan
The IRS is like a rabid dog with a bone when it comes to collecting taxes due. I am very surprised that they are suggesting getting into debt in order to pay taxes. But consider this: the IRS can take everything you have. Like everything. Think about your favorite coat. They can take it. Something to think about.
There are a number of reasons to always, or often, file an extension. The employer contribution of a Solo 401(k) plan comes to mind immediately. Your side business(es) may not have sufficient cash on hand to make that contribution (max $53,000) by April 15th but will by October 15th. Definitely don’t want to miss out on that because of an early filing – it could reduce overall federal taxes by $15-20k depending on your marginal tax bracket.
That’s a good one. However, the amount to contribute is a function of your operating profits. Since the calendar year is closed on 12/31, and all money should be paid to you by 4/18, what would the reasons be for not being able to fully fund your solo 401k?
You need the cash on hand in order to transfer to your 401k custodian. Some companies generate decent profits but have seasonal cash constraints making a Q1 contribution challenging.
Maybe you made a big investment in January or had other spending needs that draws down the cash on hand in the business like a balloon loan payment which would not reduce operating income but would reduce cash. Of course, you can always take advances against operating profits throughout the year, so while the end of year profits are strong there may be little money in the bank.
Yep, all good points. Contributing to the Solo 401k this year has been such a big time tax saver!
Not entirely relevant but I received a IRS-imposed “extension” this year. I filed my taxes and 3 weeks later was informed that the IRS needed 60 more days to review. It’s the first year I filed a joint tax return with my wife and I guess something didn’t pass their automated checks. The IRS phrased it as “an ongoing program to verify tax filings” and not an audit as of now. Have you heard of this before?
How strange. Are you supposed to receive a refund? I’ve heard that the IRS is double-checking tax returns for some people who are receiving refunds, due to some of the new tax scams. One scam is where a thief will file a fake tax return in someone else’s name, with a different address, and claim a big tax refund to get the government payout. The scam is only revealed when the real taxpayer files their real return, and the IRS realizes they have two tax returns for the same taxpayer.
It’s possible the IRS is slowing down the refund process for some people, especially if they file early, to make sure they don’t get a “real” tax return under the same SSN.
Yep, supposed to get a decent refund this year. Filing jointly helped us a great deal.
Thanks. Ugh, such scams are scary but definitely good to be aware of them. I’m not worried if it’s indeed an audit but just stinks that my refund is delayed 60 days.
It seems like my accountant can always file an extension for no real reason. There must be some sort of behind the scenes tricks they can do.
Please ask and get back to us with the reasons!
I suspect an extension allows your accountant more time to do more work and smooth out his income over the year if you see no reason why he filed an extension for you! It’s a smart business move. You can take on many more clients from 1/1 – 10/15 vs. 1/1 – 4/18.
We always pay our estimated taxes on time to avoid penalties and interest, but often file an extension with the payment rather than the final return.
You can make contributions to your IRAs up until the filing deadline which can impact the time you have to finalize the return. Also, if you have a business, your accountant will be pretty busy during this time and you may get a better rate if you file an extension and allow them to work on your return later in the year when they are less busy.
But other than that, I’m not sure there’s much benefit to this delayed filing strategy unless you are missing documents as you described above.
Nice job filing an extension! I always wondered how that worked when some companies and funds send their K1s out really late. Glad to hear the process was easy for you to e-file you extension form with the software. So far I only get 1 K1 a year and it’s from my own business so I have full control to get those done on time.
Nice job sending yourself your own K-1 on time! :)
Sam,
While the IRS doesn’t exist to do taxpayers any favors, I am a bit surprised to see that they suggest entering into debt in order to satisfy a tax liability. It seems that this suggestion is made in order to avoid the hassle of setting up payment plans. I am sure they hope most taxpayers will take this easy road. Fortunately, most of us can avoid an unexpected liability simply by paying attention.
I’ve never had to file an extension, but will file my first amendment today or tomorrow. We’re traveling the world this year but we’re paused for a couple weeks to be in a wedding, file our taxes, and see friends and family before taking off for the rest of the year. I was so relieved to sit down and get all of our taxes done in a few hours until I received a K1 the next morning in my email. A heads up sure would have been nice, but I shouldn’t have forgot about it either.
Suggesting to people that are out of money to charge their taxes on a credit card doesn’t sound like great advice. Like you said though Sam, maybe credit card interest is the lesser of two evils when compared to IRS interest and penalties.
As a way to avoid having to owe taxes and as another way to pay myself first I have 0 allowances on my W-4 for state and federal so I get the maximum amount taken out of my paycheck and I always get at least a $2670 refund each year and have it automatically sent to my brokerage account to invest it right away. This year I switched to a traditional IRA as suggested by Financial Samurai and will get a larger refund and when I turn 50 next year I’ll be making 401k catch up contributions so my refund should should be even larger then.
So you give the govt an interest free loan, lose the opportunity of spending or investing your money throughout the year but do get a bigger refund. This is only advisable for someone who is generally unable to save because they can’t budget.
– Enrolled Agent
I am not the most knowledgeable about tax information. I have never filed an extension and it all seems very complicated to me. Come the time I need to do so, I will definitely be working with a professional. I try not to anger the IRS.
Don’t worry. It’s easy as pie if you use an online tax software. It will literally take 5 minutes or less, after you’ve filled out the normal tax work.
I’ve filed extensions before due to a late K-1. It wasn’t a big deal but I did have to make the estimated payments on time.
Just curious, what are the most common reasons for not being able to afford one’s tax bill?
“what are the most common reasons for not being able to afford one’s tax bill?”
The number one most common reason is not having enough money.
lol.
Good question. Undisciplined spending behavior, medical bills, and unexpected expenses most likely.
Delayed collections of funds owed for small businesses, while having to front money for materials or goods.
Most americans working and living abroad need an extension since they need to do their local taxes first, to see how much foreign tax credit to take.
Where I live (Israel), the taxes are higher than the states and therefore will almost never owe taxes come tax time. So I always get an extension, it doesn’t mean I have to use it.
Great point. I hadn’t thought of that as I’ve never worked abroad yet. Thanks!
Fortunately, my tax situation has not warranted me to file an extension, which is a good thing. I hope my tax situation will remain the same for the next couple of years so I won’t have to get into confusion when it comes to making my tax returns and filing them on time.
I have always believed that the only and best reason to file an extension is when you have not received all your tax documents. A lot of people mistakenly or unknowingly file an extension thinking that they would get an extension on paying their taxes, which really isn’t the case. The extension is just to allow you to get additional months to file and to avoid late filing fee but it does not save you a couple of months from not paying your taxes. Those who do that will owe interest on their taxes.
Although it sometimes takes what feels like a millennium before you can talk with one of their personnel via the phone, its worth trying to speak with someone and see if there is a better option to working with them than going the high interest route to repay. In addition, it saves to be thorough in understanding and applying all deductions and credits that you qualify for, I think a lot of people may be quickly filing due to procrastination and leave some factors that would be helpful.
More taxes, yes!!
It is critical to remember that filling an extension does not equal delaying the taxes owed (for anyone who skimmed the article too fast). As you mentioned, filing an extension is only for paperwork.
Everyone is still expected to be up to date on payments on 3/15 (C Corps) or 4/15 (S Corps, Individuals) each year. That’s the simple version of it.
Coming from a big4 accounting background myself, the extension is almost always granted because paperwork can be a scramble before the due dates. If you talk to another CPA, they’ll likely have their worst tax stories from the 9/15 & 10/15 deadlines (the extended due dates).
I’ve never extended a filing myself. I’m somewhat shocked to see the IRS suggest opening a CC to pay off your balance. It is money owed to them, so I suppose they don’t really care how you pay as long as you pay.
I wonder… what is taking people and firms so long if you need more than 9/15 and 10/15 to do your taxes? Maybe a law will be passed where all firms must send their K-1s etc by 4/1 latest so there’s no constant delay or need for an extension.
Opening up a credit card balance to pay your taxes should be a WAKE UP CALL for people who believe the government will take care of their financial problems. The government’s focus is on themselves. Politicians become politicians because of EGO.
9/15 & 10/15 are the absolute deadlines to file paperwork for the IRS and I haven’t come across anyone going over the deadlines (with a few rare exceptions). As for a schedule on getting paperwork out to shareholders – going along with the K-1 example – I would imagine that is set by the partnership/c corp/etc., but I never had experience in this regard.
There are other deadlines to consider that might play into it. I know not-for-profits (NFPs) have a tax deadline of 5/15. In this regard, some entities with ties to NFPs would naturally receive relevant information in May/June.
As for politicians, I always liked the line, “DC is Hollywood for ugly people.” :)
Extensions are automatic if filed on time. And an S corp’s due date is not 4/15. It is 3/15, with final extension of 9/15. (Note that these dates are going to change for tax year 2016 and beyond.
If you can’t pay, filing an extension saves you from a failure to file penalty, but not interst or the failure to pay penalty.
Thanks for the clarification. I wish there was a way I could go back and edit my first post to make that same note as well.