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Tax Extension

The IRS tells us that if we fill out form 4868 we get an extension of 6 month to file without questions asked. This sounds pretty good but we need to understand what an extension really means to understand how form 4868 actually works. If you file Form 4868 you get an extension to file not to pay. This means that you have an additional 6 months to actually file a proper return and calculate the exact amount of taxes you owe the IRS. Form 4868 does not give you an extension to pay. When you file you need to send in a check for at least 90% of what you anticipate your taxes are going to be in order to avoid the 0.5% per month "failure to pay" penalty. So if you send in a check for less than 90% of your actual taxes when filing form 4868 you will be charged 0.5% per month penalty. Why then is it worth your time to file form 4868? Will if you don't file for an extension you will be charged not only the 0.5% "failure to pay" penalty but also a 5% "failure to file" penalty, thus costing you 5.5% of your taxes each month. How does this play out in the real world?

Well let's suppose you owed the IRS $1,000 of taxes.

If you file Form 4868 and submit a check for $900.00 at the end of 6 months you will owe just $100.00. You had to pay $0.00 in penalties.

If you file Form 4868 and don’t submit a check, at the end of 6 months you will owe $1030.38. You only had to pay $30.38 in penalties, that’s only approximately 3% of your taxes in penalties.

However let's suppose you don't file Form 4868 and don’t submit a check, at the end of 6 months you will owe $1378.83. You will have to pay $378.84 in penalties, that only approximately 38% of your taxes in penalties.

It's pretty easy to see that although From 4868 isn't exactly as perfect as the IRS leads many to believe, it is defiantly worth the 5 minutes, at most, it will take you to file if you need extra time.