Q: I filed for an extension on my taxes this year, but I was surprised to realize I still had to send the IRS a check. How does the extension work?
A: Some people get confused about what it means to file for an extension on their income tax returns. If you haven’t finished filling out your return and need more time to get it done, you can receive a six-month extension. But that doesn’t mean you get extra time to pay the taxes that you owe.
Getting an extension is easy. The fastest and easiest way is to visit the “Free File” link at IRS.gov. Here, you can use tax filing software that guides you through the steps of filling out the required forms. You can also use this service to request an extension in a matter of minutes. Anyone, regardless of income, can use this free service using Form 4868. Completing the form gives you an additional six months (that is, until October 15 for the year 2015) to file your tax return. However, to get the extension, taxpayers must estimate their tax liability on this form and pay any amount due by the April 15 deadline.
By filing this form and paying the estimated amount due, the taxpayer will avoid a costly late filing penalty, which is normally 5% per month based on the unpaid balance. In addition, any payment made with an extension request will reduce or eliminate interest and late payment penalties that apply to payments made after April 15. The interest rate is currently 3% per year, compounded daily, while the late payment penalty is normally 0.5% per month.
Alternatively, if you cannot pay the balance due, consider applying for an Online Payment Agreement, which allows you to stretch out payments over 72 months. Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. With the Online Payment Agreement, no paperwork is required, nor do you have to call, write or visit the IRS. This option enables you to level out your cash flow and budget for regular monthly payments.