Many taxpayers are scrambling right now to meet the Monday, April 15, deadline for their 2012 taxes. But whether you're a procrastinator or whether you are trying to track down a few errant forms, take heart: There is always the option of filing for an extension.
The Internal Revenue Service allows taxpayers to file their 2012 taxes as late as Oct. 15 without any penalties – presuming you ask permission to file an extension by April 15 by filling out the simple Form 4868.
But there are pros and cons of asking the tax man for an extension, so make sure you know what you are getting into.
PROS OF A TAX EXTENSION
All you have to do is ask. The IRS doesn't care why you are asking for an extension. It only cares whether you ask by April 15, and whether you fill out the very simple form correctly. Meet those two simple thresholds and you'll be granted an extension.
Save yourself an audit. A common misperception is that extensions make you more likely to suffer an audit. But you may be much more likely to be audited by failing to file a return at all with the IRS or rushing and making a boneheaded mistake that raises a red flag with auditors.
Save yourself late penalties. The IRS charges you two kinds of penalties for missing the deadline: The first is one is a failure to file penalty, which is commonly 5 percent of taxes due for each month past the deadline. This penalty will not exceed 25 percent. The second is a failure to pay penalty if you have taxes due, which is 0.5 percent of unpaid taxes per month, with a cap again at 25 percent. You don't want to mess with charges like these.
Wait six days or six months. Although few Americans file their returns three months before tax day because of a lag in getting paperwork, there's no reason why you can't file three or four months before the October deadline. Heck, file April 16 if you want. The extension simply gives you the option to wait six months, not the obligation.
Cheaper preparation. Not surprisingly, some tax-preparation businesses charge a premium on any work done in March or April. If you file an extension and go to your accountant in July, chances are you'll probably not pay as much for the return.
CONS OF A TAX EXTENSION
No more time to pay. This is a biggie. Unfortunately, an extension on the paperwork is not an extension on your bill. When you file for an extension you need to estimate what you owe and then send payment on or by April 15. If you don't, you'll face interest and penalties even if granted an extension. Obviously this is not an exact science, so the IRS will waive any penalties if you pay at least 90 percent of your tax bill up front and then submit the remainder with your formal return by October 15. But make sure you err on the side of overpayment if you're making an extension or else you could get stuck with steep fees even if you have permission to file late.
A longer wait for your money. Some folks see a big tax return as a built-in savings mechanism. But on the other hand, consider that this isn't a windfall or a bonus – it's your money that you overpaid in taxes. That's why it's called a tax "refund." If you have double-digit interest on credit card debt or a pressing need for cash, why should Uncle Sam be allowed to sit on your money? Even if you just were going to sock the tax return away in a savings account, at least by taking ownership back you'll start earning interest instead of letting the cash collect dust in the U.S. Treasury.
Delaying the inevitable. If you're filing for an extension out of procrastination, you could very well continue to procrastinate and face the same time crunch in six months — with no safety net this time. Make sure you're actually using the extra time instead of just wasting it.