Get a 6-Month Tax Extension

The April tax deadline always seems to arrive before people feel they are ready for it, but there's a simple way to extend this daunting deadline for tax returns. If you're unable to complete your returns by that deadline, you can file Form 4868, an application for automatic extension, with the Internal Revenue Service (IRS).

SEE: Personal Income Tax Guide

When you file for an extension, you're simply asking for more time to complete your tax forms. The IRS is not granting you more time to pay any taxes that are due. If you owe taxes as of the April tax deadline, expect to pay interest – and possibly a penalty – on the amount due if you choose to take the extension. Read on to learn how to give yourself the gift of time, without paying an arm and a leg for the privilege.

Whether you're subject to a penalty depends on the amount of taxes you owe. (To learn more, see Tax Tips For The Individual Investor.)

Let's look at the basics:

• Failure-to-File Penalty: If you don't file an extension request by the April tax deadline, the "failure to file" penalty runs at a rate of 5% of the balance due per month, up to a maximum of 25% of the taxes owed.
• Failure-to-Pay Penalty: If you do not pay your taxes expect to get hit with a "failure to pay" penalty that runs at 0.5% per month with a maximum of 25% of your unpaid tax. That's in addition to any interest you'll owe on the balance due.
• Interest: If you have a balance due to the IRS after the April tax deadline, expect to be charged interest, which compounds daily from the due date of the return until you pay your taxes in full. The interest rate is the federal short term rate, plus 3%, which is a lot less than the rate charged by most credit card companies.

 "Reasonable cause" may be a reason for the IRS to decide not to charge a penalty that you would otherwise owe. Click here for the IRS website's discussion of what qualifies as reasonable cause and how to establish it. Even establishing reasonable cause may not remove interest due on unpaid taxes, however. It may make sense to consult a tax advisor for help in these situations.

What if you need more time to pay your taxes? If the amount you owe is low enough that you won't be subject to the failure to pay penalty, then file an extension by the April tax deadline and pay the remaining balance due when you submit your tax forms prior to Oct. 15.

If you owe so much in taxes that you won't be able to pay them off by Oct. 15, one option is to file the paperwork to enter into an installment arrangement with the IRS. This is done by completing Form 9465, and attaching that form to the front of your federal income tax return. On this installment request form, you tell the IRS how much you can afford to pay each month and the day of the month that the payment will be made.

The IRS generally charges a fee of between $52 and $105 to any taxpayer who enters into an installment arrangement. In addition, the IRS will charge interest at the prevailing federal rate (approximately 5% per year). Plus, failure to make a scheduled payment will cause the remaining outstanding balance to become immediately due. In addition, you generally aren't allowed to enter into an installment agreement if you have an open installment agreement for a previous year that hasn't been paid off yet. (For details, see Form 9465: Don't Pay Your Back Taxes Without It.)

Self-employed individuals might benefit from filing for an extension as well. That's because they have until the due date of their tax return, including extensions, to fund their retirement accounts for the year. If an individual doesn't have a retirement plan set up yet, an SEP IRA can be established as late as the extended due date of his or her tax return, or Oct. 15. (To read more about filing retirement tax forms, see The Saver's Tax Credit: An Added Incentive to Fund Your Plan, Retirement Plan Tax Form 5329 – When to File and Retirement Plan Tax Form 8606 – When to File.)

By filing Form 4868 with the IRS, you get an additional six months to fund your retirement plan and deduct the contribution made on your prior year's return. One strategy common to self-employed individuals is to pay the full amount of taxes due with an extension, and then to fund their retirement plans prior to Oct. 15.

Keep in mind that an extension does not give you any extra time to fund your Roth IRAs, Traditional IRAs and Coverdell Education Savings Accounts (ESAs). The due date for these tax-advantaged retirement plans and college savings accounts is generally April 15.

The moral of this story is simple. Because the 'failure to pay' penalty is so much smaller than the 'failure to file' penalty, always try to file all of your tax returns and extension requests on a timely basis, even if you're unable to pay the full amount of the taxes due at that time. Simply filing on time will save you a lot of money and frustration, so take a moment to check your filing now and see whether an extension would benefit you. For more, see How to File a Tax Extension.

To read some commonly asked questions about taxes, see How do I avoid paying excess taxes on securities I have sold?, How can I make sure I'm ready to file my taxes? and Which is better for tax deductions, itemization or a standard deduction?