The tax-filing deadline was extended to May 17, 2021, because of last-minute tax law changes by Congress, and you may still have work to do on your return. If you don’t think you can make the deadline, you should request an extension. Otherwise, you could get hit with expensive penalties.
“One important cautionary note for taxpayers is to always get your return filed on time, by the original due date of May 17 or the extended date of Oct. 15, even if you must amend the amounts later,” says Bret Scholl, a CPA in Corral de Tierra, California.
There’s no penalty if you miss the deadline and you don’t owe money — but you’ll have to wait longer to receive your refund. But if you do owe money and miss the deadline, you could get hit with two penalties: a late-filing penalty of up to 5% of the unpaid balance each month, up to a maximum of 25%, and a monthly penalty for failure to pay on time, which is 0.5% of the unpaid taxes. The late-filing penalty is ten times the penalty for failing to pay on time. “Even if a taxpayer cannot pay, always file a return on time,” says Scholl. “A payment plan can always be worked out and the penalties may even be able to be reduced in some circumstances.”
How to File for an Extension
It’s easy to request an extension, which will push your deadline to file your tax return to Oct. 15. Keep in mind that even though the tax-filing deadline was extended by one month this year, until May 17, the deadline for filing the return with an extension hasn’t changed. “The deadline for extensions is still Oct. 15,” says Steven Hamilton, an enrolled agent in Grayslake, Illinois. “There is no adjustment for the second deadline, even though many people think that is the case. It can be a huge pitfall.”
You don’t have to explain to the IRS why you’re asking for the extension — you just need to file Form 4868 requesting an extension by May 17. “Getting an extension of time to file your federal tax return is truly automatic by just taking a simple step: Let the IRS know you want the extension,” says Scholl.
You can file Form 4868 on your own, through a tax preparer or a software program. People of all income levels can use the IRS FreeFile program to file for an extension for free. On Form 4868, you’ll estimate your total tax liability and list any tax payments you’ve already made for 2020. You need to estimate the balance due and how much of that amount you’re paying.
If you owe money in taxes, getting a tax extension doesn’t delay the deadline for paying — that money is still due by May 17. “An extension is for time to file your return, not for more time to pay,” says Hamilton. “Taxpayers must still pay their balance due by the due date of the return.” You need to do enough work on your return before the original deadline to estimate how much you may owe and send in the money with your extension request.
“Taxpayers are supposed to file the expected amount due with the extension request,” says Mary Kay Foss, a CPA in Walnut Creek, California. “If what they pay in with the extension does not put them within 90% of the final tax liability, the IRS can assess a penalty for failure to pay.”
Check with your state’s department of revenue to find out if you need to file for an extension of your state income tax return, too.
Why File a for an Extension?
Some people file for an extension because they’re slow to get started on their taxes or they’re waiting for paperwork or additional documentation. “The most common reason a taxpayer would want additional time to file their return is to gather information they’ve not yet received or get more organized with complete information,” says Scholl. It’s not unusual to have to wait to receive Schedule K-1 for partnerships, S corporations or trusts. Try to get an estimate of the income you’ll need to report from these entities, even if you haven’t received the paperwork yet, so you can calculate how much you have to pay in taxes by the deadline.
In some cases, having the extra time to gather more records can help you find more deductions. “For gig workers, business owners, rental property owners or others that are able to deduct expenses it can make a lot of sense to extend their returns if their recordkeeping is a mess,” says Scholl. “Once they take the time to add up all those small expenses they’ve forgotten about through the year, it suddenly adds up to a material deduction for them.”
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Others may file an extension this year because of last-minute tax law changes. For example, the American Rescue Plan, the stimulus bill signed on March 11, 2021, excluded up to $10,200 in unemployment benefits from taxes for 2020. Since the exclusion was passed so late in the year, some forms and software programs are still being updated to account for the changes.
“The IRS indicated that it will automatically adjust returns that were filed before the legislation to account for the tax-free portion so amended returns need not be filed; but CPAs have discovered that the change in the taxability of the unemployment benefits may affect other items on the return,” says Foss. “Many feel that amended returns would still need to be filed if returns with unemployment are filed without an extension.”
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Update 04/16/21: This story was published at an earlier date and has been updated with new information.