If something prevents you from filing your federal or state income tax return by the usual tax deadline of April 15, you can end up having to pay penalties for late filing on top of your tax bill for the year. The good news is that you can usually file an extension with the IRS and your state to help reduce penalties and get up to six extra months to send in your tax return. The steps for requesting your tax extension depend on whether you're an individual or business as well as where you live.
Take a look at this guide to learn about how a tax extension works and which steps you need to take at the federal and state levels.
Basics of a Tax Extension
For most taxpayers, federal and state tax returns are due on April 15. If that's on a weekend or holiday, then the deadline moves to the next business day that's not a holiday. Some business types, like corporations and partnerships, have an earlier deadline of March 15.
Due to the COVID-19 pandemic, the IRS had given taxpayers an automatic extension for their 2019 tax returns in 2020 to July 15. As of publication, however, the IRS hasn't announced any similar provision for people filing their 2020 tax returns filed in 2021. So, if you find yourself approaching the filing deadline and needing more time, it's worth looking into a tax extension before the filing deadline arrives.
When filing a tax extension with the IRS or your state, you usually get six months longer to file your tax return. For people filing individual federal tax returns, this pushes your income tax return due date to Oct. 15. At the federal level, certain businesses with the March 15 tax deadline get extensions until Aug. 15, while trusts and estates get a Sept. 30 deadline. State extension lengths can vary but are often until Oct. 15 for individuals and somewhere between Sept. 15 to Nov. 15 for businesses, depending on the type.
Read More: When Is a Tax Return Considered Filed With the IRS?
Reasons for Requesting an Extension
Reasons for needing an extension can range from tax situation such as delays in receiving important tax documents like W-2 and 1099 forms to having family emergencies that don't leave you with enough time to file your taxes yourself or schedule an appointment with a professional tax preparer. However, if your reasoning for wanting an extension involves not having enough money to pay your expected tax bill, be aware that the tax extension doesn't change the usual tax payment deadline to avoid the late payment penalty.
Importance of a Tax Extension
Filing for a tax extension is important to help you avoid, or at least reduce, the tax penalties you will owe. For example, the IRS charges you a monthly penalty of 5 percent of the tax you owe if you don't file on time and haven't requested an extension, and this can go up to a maximum of 25 percent of your taxes due. Your state may have a similar penalty and maximum as well, though they may have a special program to avoid the penalty under certain circumstances,
Penalties for not filing by your regular due date can especially add up when coupled with penalties on unpaid taxes that you pay whether you get an extension or not. The monthly penalty for late tax payments is 0.5 percent of the amount owed and can go up to 25 percent, and you usually face interest charges too.
Read More: What Happens If I Send My Tax Return Late?
Getting an Individual Federal Tax Extension
If you need an extension to file your individual federal income tax return, then the IRS recommends that you complete Form 4868 before the initial Apr. 15 tax deadline comes around. This form also applies to sole proprietors and people who have formed single-member LLCs, since these business owners only complete a regular individual income tax return with some extra forms for reporting business earnings and expenses.
You need to fill out two sections on Form 4868. The first part covers identification and asks for your name, address and the Social Security number for you and your spouse. The second part asks for 2020 tax information, including your total tax liability, total payments, remaining taxes due and the amount you plan to pay at the time of the extension request. You also need to specify whether you're currently abroad or need to file Form 1040-NR.
While you can complete the paper form and send it to the IRS using the address designated for your location, you can also e-file your Form 4868 through online tax software. You should find a button in the software to request an extension, and it walks you through the specific steps. You don't need to worry about submitting any proof backing up why you can't file on time, since the IRS typically gives automatic approval to individual tax extensions.
Getting a Business Federal Tax Extension
If your business type is a corporation, multiple-member LLC or partnership, then you can file Form 7004 to get an automatic extension of time to file your business's federal tax return. This form also applies to those who file trust or estate tax returns as well as several other special returns that are listed on the tax form. Like Form 4868, this is a two-part form, and you can e-file it in many situations or send it to the corresponding IRS address by mail.
When filling out Form 7004, you provide your full name, identifying number and address on the top portion. Next, you move on to part one where there's a list of all the types of returns for which the form applies. You must locate your specific IRS form in the list and enter that code above the list.
When you get to the second part, you answer questions about whether you're a foreign corporation without a U.S. location, if you use a consolidated return or if you're a partnership or corporation where special regulations apply to you. You also need to specify the calendar or tax year for which you need an extension and provide a reason if you're having a short tax year. The IRS asks for how much in taxes you expect to pay, which credits and payments apply to your business and what the balance will be.
Getting a State Tax Extension
To get an extension to file your state taxes as a business or individual, check your state tax agency's website since processes widely vary. Some states, such as Alabama, don't require filing for an extension at all and automatically extend your state tax return due date if you miss the initial deadline. Others, including Connecticut, require nothing extra as long as you've completed the federal tax extension process; if you haven't, you must complete a state extension request form to report taxes due.
Be aware that some states have a rule that you need to have paid a percentage of your state taxes due to qualify for an extension and avoid late filing penalties. This is sometimes the case even for automatic extension programs and can be as high as 90 percent.
If you do need to file a state form for an extension, you may have phone, online and mail options to do so. In cases where a federal extension gives you a state extension too, you often have to submit a copy of Form 4868 at the time of filing your state return.
Handling Issues With Paying Owed Taxes
Even if you can get a tax extension for both your federal and state taxes, you might still have concerns about how to pay your taxes, since those are due on time despite the later filing deadline.
Here are some options you have if you can't afford to pay in full:
- Credit card or loan: Depending on the amount of tax due and the interest rate on your credit card or loan, you could pay your taxes this way and then make payments to the creditor rather than have a debt with the IRS or your state's tax agency. This can be especially convenient if you just need a little more time to get the money for your taxes, and you can easily make your tax payment online.
- Delay of tax collection: If you've faced a substantial financial setback and have documentation to back it up, the IRS may give you a temporary deferral to prevent collections actions. The IRS requests information about your living expenses, possessions and income to make their determination. If you get approved, interest and penalties usually still apply, and the IRS expects you to pay your taxes when you can afford to.
- IRS payment plans: Whether you need just a few months or as long as several years to pay off your federal tax debt, the IRS has installment agreements with different terms based on the tax amount due. Short-term plans of up to four months require no setup fee, while long-term agreements have a fee that depends on the method used for the request, your income level and your decision to set up or not set up automatic payments using your bank account. You pay monthly until you've paid off your tax debt and the interest and penalties that add up.
- IRS offer in compromise: If your goal is to pay less than the amount the IRS says you owe, then you could consider making an offer in compromise if you have financial information that can back up the claim that you can't afford the taxes due. You can make a lump sum request and pay 20 percent at the time of submission, or you can send the IRS a smaller payment and note a desire to make monthly payments until the offer amount is paid. The IRS evaluates the offer, notifies you of a decision and gives you the chance to appeal, if necessary.
- State payment plans: Like the IRS, your state tax agency may have a payment plan option where you may pay a small fee to set up a short- or long-term arrangement with interest and penalties likely applicable.
Read More: Can the IRS Change an Installment Agreement?
Seeking Tax Penalty Relief
If you end up facing penalties due to not filing your taxes on time or at all, or you're unable to pay your taxes on time, then you can consider the IRS penalty relief options. However, you can expect to undergo a more difficult process than requesting an extension. As to qualifying, you'll need to fall under one of these three criteria and be able to prove that something hindered you from filing or paying your taxes:
- You have a reasonable cause such as a natural disaster, death or illness that has affected your household.
- You face tax penalties for the first time and have shown a good history of compliance in the past.
- A statutory exception – such as facing a penalty due to the IRS providing you with incorrect information – applies to you.
Depending on the situation, you may need to complete a form, provide documentation or write a letter to the IRS. Your penalty notice should have a phone number to call so you can speak with an IRS worker about seeking relief. You can check with your state to find out if they offer any penalty relief programs as well. You might also want to consult a tax professional.
Read More: What If You Miss a Year Filing Your Taxes?
- IRS: IRS Form 4868
- eFile: IRS Tax Extension Form 4868
- IRS: Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns
- Alabama Department of Revenue: Individual Income Tax Filing Information
- Connecticut State Department of Revenue Services: Filing for an Extension of Time to File
- IRS: Penalty Relief
- IRS: IRS Payment Options
- IRS: Apply Online for a Payment Plan
- IRS: Offer in Compromise
- IRS: Filing and Payment Deadline Extended to July 15, 2020 - Updated Statement
- IRS: Topic No. 304 Extensions of Time to File Your Tax Return
- California Franchise Tax Board: Extension to File
- IRS: Information About Your Notice, Penalty and Interest
- TaxAct: Tax Calendar Federal Due Dates
- OLT: Learn More About Your State Extensions!
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.