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Not ready to file your taxes? Filing for an extension can help you owe 'significantly less,' accountants say

"Even if you're unsure of what you owe or don't owe, you need to file that extension."

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Twenty/20

Tax procrastinators have just a few days left to file their 2020 returns. In March, the IRS pushed the deadline for individual filers from April 15 to May 17, due to logistical concerns caused by the coronavirus pandemic and the rollout of economic stimulus payments.

If you've waited this long to file, you may be feeling the same way you did the night before that fifth grade book report was due, when you hadn't, in fact, read a single page of "Johnny Tremain." You could still manage to get everything in on time, which would be ideal. But if you're unprepared to file your taxes, say, because you're missing important documents, the IRS, just like your teacher Mrs. Silverman, will let you take an extension if you ask for one.

Filing for an extension is likely the best option for folks who don't think they can file by Monday, says Dan Seff, a certified public accountant and senior managing director of CBIZ MHM's Colorado office. "Even if you're unsure of what you owe or don't owe, you need to file that extension," he says. "You'll owe significantly less than you would if you fall into the category of a non-filer."

Here's what you need to know if you haven't filed yet.

How to file for an extension if you need one

If, for whatever reason, you're unable to file a tax return by the May 17 deadline, you have until then to file for an extension, which, this year, will push back your deadline to file by 5 months. To ask for that extra time, you'll have to file IRS Form 4868, which will give you until October 15 to get everything in. "You can file an extension using any commercial tax software," says Jennifer Marshall, an enrolled agent and the director of tax services at Bryn Mawr Trust. "You can also file it for free through the IRS website."

You may have to file for an extension on your state taxes separately, adds Seff. "Many states will use your federal extension as a guideline," he says. "But you should check to see if your state requires you to file separately. New York is an example of a state that does."

There are plenty of reasons folks may need more time to file this year, Seff says. "It's been a tough year for everybody. Even sophisticated people are missing out on tax moves they should be making," he says. "This allows you time to think about it, and ask yourself, 'Did I pick up all of the credits and deductions I could have taken?'"

One major drawback to pushing things back or not filing at all: If you're owed money, either because you're receiving a refund or because you have yet to collect one or more of the economic stimulus payments, it'll be that much longer before you're able to receive it, says Seff. "If you're owed a recovery rebate or plan to take the child tax credit, not filing in a timely manner will put all of that on hold."

Even if you file on time, you might be in for a wait: Taxpayers are reporting delays of 6 to 8 weeks after they file to receive their refunds, as the IRS recently reported a backlog of 29 million tax returns being held for manual processing.

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It's an extension to file, not to pay your taxes

If you expect to owe a bill come Tax Day, it's important to note that an extension merely gives you more time to file, not more time to pay. You'll need to pay at least 90% of what you owe in federal taxes by May 17, or you'll owe interest of 3% on the amount you owe plus an underpayment penalty of 0.5% of the amount you owe for each month or part of a month you fail to pay, up to 25%.

Filing for an extension at least keeps your costs to a minimum, however, if you can't pay right away. That's because the penalties for failing to file a return are much steeper. Skip filing altogether, and you'll owe 5% of the amount you owe per month.

Likewise, if your return is more than 60 days late, the minimum penalty for your tardiness is the lesser of $435 or the amount of your whole bill. Penalties for failure to file and failure to pay state taxes vary from state to state.

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Skipping Tax Day is the worst-case scenario

Whatever you do, experts say, don't ignore the tax man altogether.

"You should never just not file," says Marshall. "It costs you money you can avoid paying by filing an extension for free online."

Can't afford to pay what you owe? The IRS offers payment plans and installation agreements that can drastically lessen penalties and fees.

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Although your instinct may be to avoid the IRS at all costs if you're feeling the crunch of a big tax bill, it's a much better idea to work with them, says Seff.

"If you can't pay, the first step is to file something — either a return or an extension," he says. "Then contact the IRS. They're very reasonable and used to accommodating tough situations. What they don't like is when they don't hear from you."

If they don't hear from you, chances are good you'll hear from them, he says. "If you're working, your employer reports your income to the IRS," he says. "If they have your W-2 or 1099 in their system that doesn't match with a filed return, they're going to send you a 'love letter' saying, 'Hi, you owe us money. And because you're late, you owe a massive penalty.'"

This article has been updated with regards to Jennifer Marshall's title.

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