Need more time to file your taxes? File an extension

It seems one minute you are receiving your W-2 in the mail, the next minute, April 15 has passed. Maybe the first quarter of the year was so hectic that filing your taxes simply slipped your mind. Or maybe you knew you owed the IRS money that you didn't have in your bank account. Whatever the reason for missing the April 15 deadline, you figured you'd file an extension and be done with it. However, what does an extension mean if you owe taxes? Just because you are getting an extension to file, it doesn't give you an extension for paying the IRS.

Extension to file, not extension to pay

The IRS predicts that nearly nine million people will file an extension this year, extending their deadline to file by four months. Many times, this is because tax filers complete their tax return only to find they have a balance due and think, "No problem, I'll just file an extension." This is a very dangerous and expensive attitude to have because extensions are only valid for filing your tax forms. An extension does not extend the deadline for paying your tax liability.

If you owe the IRS, you must make a proper estimate of your tax and pay it in full by April 15. If you do not pay your tax by April 15, or at least make an effort to compute and pay your balance due, the IRS will calculate penalties and interest on your outstanding balance. If you overpay your taxes, you can get a refund or apply the overpayment to your next year's taxes. But, if you underpay, you could begin a very expensive relationship with the IRS thanks to penalties and interest.

Not filing? Not paying? Bad idea

If you did not file on time and owe tax, you may owe a penalty for failure to file, in addition to a failure to pay penalty, unless you can show reasonable cause. According to the IRS, the combined penalty is 5% (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%. The late filing penalty applies to the net amount of tax due shown on your return and any additional tax found to be due, reduced by any credits for withholding and estimated tax and any payments made with the return.

If you still do not pay tax after five months, the 0.5% failure-to-pay penalty continues to run up to 25% until the tax is paid. Also, if your return was over 60 days late, the minimum failure-to-file penalty is the smaller of $100 or 100% of the tax required to be shown on the return. So, failing to file your taxes for two months or more will guarantee at least $100 from your pocket.

Filing forms for four-month and six-month extensions

An extension is filed by using IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. If you need time beyond the automatic extension, you must file Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return, which gives you an additional two-month extension.

Extensions can be filed by mail, via the Web at www.irs.gov, or by calling the IRS at 1-888-796-1074 by midnight on April 15. The IRS even accepts all major credit cards or bank cards.

Calculate your tax bill accurately

Whether you are filing your extension request on paper, electronically, or by phone, it is important to estimate your expected final tax liability as accurately as possible. If the IRS determines that you did not make a reasonable effort to determine your tax liability, the IRS can deny the extension retroactive to April 15. What does this mean to your wallet? If you owe a payment on your tax return, the IRS will begin monetary penalties from the April 15 date.

Any payments made with Form 4868 should be listed on line 68, Form 1040. If you file Form 1040EZ or Form 1040A, include any payment you made with Form 4868 in your total payments on line 9 of Form 1040EZ or line 43 of Form 1040A. Also, write "Form 4868" and the amount in the space to the left of line 9 of Form 1040EZ or line 43 of Form 1040A.

Visit the IRS website for more information on filing extensions with the IRS.