NEW YORK (MainStreet) — With the tax deadline day of April 15 approaching fast, you might be thinking "delay, delay, delay," and that's no crime — unless you don't let the IRS know you plan on filing for an extension.
If you do plan on filing taxes late, you're not alone. About 8% of all tax filings — about 11 million taxpayers — are filed after April 15.
But don't do it unless you know the rules, so Uncle Sam doesn't come knocking with a big tax bill in hand.
First off, know how much time you have to file late. Filing an extension gives you a grace period of six months, pushing your deadline to Oct. 15. But, says John Gregory, founder of 1040Return, a Baltimore, Md.-based tax services provider, "the IRS allows you the extension for the sole purpose of arranging for and organizing your documents," he says. "Don't assume that you're getting an extension for paying off your tax liabilities. You still have to pay your taxes by April 15 — at least 90% of it to be precise."
If you're buying yourself six months' time to put off your tax payment, it won't be wise. "The IRS will continue to charge interest on the unpaid tax liability — you'll only end up losing more money," he adds.
When you do file for an extension, you'll be expected to provide a ballpark figure on your tax liability for 2014. "You have to give a reasonable estimate of your tax liability for the year based on the information you have at that time," says Steven E. Warren, a certified public accountant at Lehrman, Flom & Co., in Minneapolis. "If you don't, your extension request may be considered invalid and you'll be subject to late filing penalties."
Warren also advises that you're expected to pay any tax liability now, not later, per IRS rules. "If you cannot pay your balance due, still file the extension and pay what you can. If it will be some time before you can pay off the balance, it will likely be in your best interest to enter an installment plan to pay the remaining balance," he says.
When you do provide your debt obligation, go big, says Alan Strauss, a tax professional and former chairman of the New York State Society of Certified Public Accountants. "Be sure to overestimate your expected tax liability — even if you cannot pay that amount now. Don't worry about what you can pay; show your liability to be what you really think it will be after some conservative calculating. If it turns out you owe less than you thought, nothing happens. If you owe more than you report, you could be liable for either a 'failure to file' penalty or a 'failure to pay' penalty or both."
If you underestimate by too much, the IRS can invalidate your request and the penalty could be as much as an extra 27% when you file in October, Strauss adds.
Filing your taxes late may give you the breathing room you need to get your taxes done right. Just know going in what's expected of late filers by the IRS, and accommodate every step to the letter. If that's going to be a problem, bring a tax professional on board to steer the course for you. That may cost several hundred dollars or more, but the bill could be much higher if you go it alone and file an error-filled tax return.
— Written by Brian O'Connell for MainStreet