Why and how to file an extension

You don’t have all your information. You’re too busy to get it together. You don’t have the money to pay. I’ve heard these and many other reasons why people cannot file their tax returns on time. Whatever your reason, you need to file an extension.

The most important reason for this is that if you owe money, the penalty for not filing your tax return on time is 5% per month up to 25%. So if you wait two months, it will cost you an extra 10% of the amount you owe to the IRS.

This doesn’t mean it’s not going to cost you anything. You still have interest accruing on your unpaid balance and there is a late payment penalty of 1/2% per month. But these are small compared to the late filing penalty described in the previous paragraph.

And filing an extension is as simple as filling out a Form 4868 and mailing it into the IRS. Please note that you are supposed to make a reasonable estimate of any tax liability in order for the extension to be valid. That’s why, when clients tell me to file an extension for them, I let them know that I need their W-2 or basic information in order for the extension to be valid.

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