Extension of Time to File Form 1040 U.S. Individual Tax Return
A common misconception of requesting an extension of time to file a tax return is that the extension provides additional time to file and pay your taxes. An extension only extends the time in which to file the tax return and does not provide any additional time to pay any tax that may be due on the return. That is why the Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, requires you to estimate your tax liability and your “payments”.
Even though you may have submitted the Form 4868 electronically or submitted the paper form and received an acknowledgment or confirmation number, that doesn’t mean you avoid a late filing penalty if you owe tax on the return.
Should you owe tax on the return, the failure to file penalty will apply and is computed at 5% per month for a maximum of 5 months, or 25% of the tax. The penalty is reduced to 4.5% per month or a maximum of 22.5% of the tax due if the failure to pay penalty runs concurrent with the failure to file penalty.
Another misconception is that once a Form 4868 has been approved it extends the time to file indefinitely. A request for extension extends the time to file 6 months and only applies to the immediate prior year. An extension request must be submitted by April 15 of the following year. For example, for calendar year 2012 returns, a request for extension would have to be submitted between January 1, 2013 and April 15, 2013. The due date for filing is then extended to October 15, 2013.
However, if you have a sufficient amount of tax is paid via withholding credits, estimated tax payments (or other credits) to where you will be entitled to a refund; a form 4868 is not necessary, nor required. Because the failure to file penalty is only computed on tax due, even if you did not submit a 4868 but filed late, there would be no failure to file penalty (or failure to pay penalty).
So does that mean if you cannot get your tax return filed by April 15 and think you have paid in a sufficient amount of tax, that you shouldn’t file a Form 4686? Until such time that the actual return has been completed and ready to file, you don’t know if in fact you paid in enough or will be entitled to a refund. Therefore, you should submit the 4686 timely and pay any required payment with it.
If you pay at least 90% of your prior year tax liability via withholding, estimated tax payments or payments made with Form 4868, even if you have a balance due, you can avoid the failure to file penalty. For example, if you filed your 2011 form 1040 by 4-15-2012 and your total tax on the return (before credits) was $10,000 and for 2012 you estimate your tax liability to be $10,000 and had $9,000 tax withheld from your pay, you submit the Form 4686 with a $1,000 payment by April 15, 2013. However, using the following example: that you prepared your 2012 form 1040 and filed it October 15, 2013 and your total tax is $10,900. Because your credits only totaled $10,000 you would normally be charged the maximum failure to file penalty of 22.5% (5 months x 4.5% = 22.5%) and failure to pay penalty for 5 months (.05% per month x 5 months = 2.5%). In other words, 25% of the tax due of $900, or $225. (Failure to file penalty of $202.50 plus failure to pay penalty of $22.50).
However, because you paid in at least 90% of your actual tax liability ($10,000 is 92% of $10,900), you can avoid the penalties by submitting a statement with your tax return that at least 90% of your prior year’s tax liability was paid, you’re paying the additional tax due and requesting abatement of any failure to file and failure to pay penalties.
If you did not pay in at least 90% of your year’s tax liability, then both the failure to file and failure to pay penalties will apply to any balance due, as well as interest computed on the unpaid tax and penalties. In order to qualify for possible abatement of penalties in this situation, consult a tax professional to see if you qualify for additional reasonable cause criteria.
It is important to remember that state laws differ and this article only pertains to U.S. Individual Tax Return, Form 1040.
You should also keep in mind that there is a three year statute to file a return and receive any refund that may be due on a U.S. Individual Tax Return, form 1040. Therefore, even though you may be entitled to a refund of withheld tax or refund of estimated tax payments, you will lose this refund if you file more than three years after the due date of the return. For instance, a 2012 form 1040 is due 4-15-2013. You have until 4-15-2016 to file the return and receive any refund that may be due.