This year Tax Day is April 18th. Because of the day of the week, April 15th is NOT the due day this year.
Although you have an extra weekend to deal with your taxes, it still may be a good idea to consider an extension AND maybe make a payment if necessary.
Bottom line, IF you think you owe and can’t pay your taxes, there are some very important steps you need to take to minimize the damage.
Is it Ok to File an Extension?
Yes! Absolutely. Filing an extension for your personal tax return (1040) does not increase your chances of an audit. An extension simply buys you until October 17th to file (and there is no cost to file an extension).
In fact, if you had a side gig in 2021, taking time the time with an extension to dig up any extra write-offs or strategies could be exactly what the “doctor/cpa” ordered. See (Form 4868).
REMEMBER: If you owe more taxes for 2021, the ‘Extension’ is NOT an extension to pay, but simply to file your return. THUS, if you do owe for 2021 and don’t pay by April 18th, there will be penalties and interest (more on that below).
But…it’s not the end of the world to file an extension. Don’t listen to family or friends that have always filed before April 15th and are freaking you out with doomsday stories for not filing your return by the 15th,
There are no costs if you don’t owe and expect a refund.
IF YOU DO OWE… the actual rate of interest and the penalties aren’t as bad as you might imagine. Yes, there is a Late Payment Penalty (more on this below) that kicks in if you don’t pay your taxes by April 18th, but the real cost adds up if you don’t pay by October 17th (more on that later as well).
As for now…MAKE SURE…even if you can’t pay your taxes, you file an extension. This is because the penalties for ‘not filing’ are far worse than for ‘not paying’.
What are the Consequences for Not Paying Your Taxes?
First, be aware there is a Late Payment Penalty that kicks in if you don’t pay any remaining taxes due by April 18th this year.
Here’s how the interest and penalties are calculated on what you owe between now and October 17th, AND continuing thereafter:
- Interest due – The interest on any unpaid taxes accrues at the annual rate of six percent (6%). Which is not too bad actually, but it’s the penalty that will catch up to you.
- Penalty due – This falls under the “Failure to Pay” penalty accrues at the rate of only one-half a percent (.05%) per month or part of a month (to a maximum of 25%) on the amount actually shown as due on the return.
EXAMPLE: In real numbers, if you file an Extension on April 18th, and take the next six (6) months to ultimately pay your $10,000 tax (let’s assume before October 17th), your interest and penalties would be as follows:
3% in compounding interest for approximately 1/2 of the year, AND
3% in penalties (.05% x 6 months).
The total would be approximately $550 in penalties and interest. Again, not the end of the world and not too bad of an interest rate either. BUT you have to work quickly because those penalties add up fast.
Second, there is a a Failure to File Penalty IF you don’t at least file an extension. However, by simplly filing an extension the IRS gives you until October 17th, 2022 to file.
But remember, filing an extension … is ONLY an extension to ‘file’, and IS NOT an extension to pay. Also, an extension doesn’t help you after October 17th. Read more in my article: “What to Do if I Can’t Pay My Taxes by October 17th“.
Steps to Take if You Can’t Pay Your Taxes by April 18th
So…what to do if you can’t pay your taxes this year by April 18th?
- Don’t beat yourself up and deal with it.
- File a personal extension no matter what!
- Send in any money you can with your extension.
- Plan and estimate the damage before the October 17th deadline.
You can Deal with It!
First, many of us at some point in our lifetime are going to experience at least one year where we’re faced with a daunting tax bill.
However, not being able to pay one’s taxes is actually a very common occurrence. Even the most careful and successful people can have a problem paying their taxes due to an unforeseen situation.
So, don’t stress if you can’t pay your taxes come April 18th! Yes, I know that’s easier said than done. But it’s absolutely critical you keep your wits about you. Ignoring the situation will only make things worse.
Too many people get overwhelmed feeling like it’s a hopeless situation, and as a result of those feelings, choose to do nothing. Making matters worse, they then mistakenly assume that the problem won’t get worse if they deal with it later. Wrong! Don’t lose hope! There are things you can AND need to do that will lessen the pain and minimize collateral damage.
File a Personal Extension No Matter What!
Even if you can’t pay, if you don’t file an extension by April 18th, it only makes things worse! Does it sound like I’m repeating myself? Well, I just want to emphasize, the penalties for ‘Not Filing’ are FAR worse than for ‘Not paying’.
IMPORTANT NOTE: With the extension filed you can now take your time to file your return BEFORE October 17th and pay what you can before then. However, I just want to stress, the most important thing an extension does is help with the penalties for ‘not filing’ for approximately 5 more months of time.
The IRS just doesn’t want to be in the dark during this period of time and nails you with penalties for not keeping them ‘in the loop’. You HAVE TO REQUEST more time if you want until October 17th to file.
2021 Tax Return Extension Deadlines
Send What Money You Can With Your Extension
Include as much of a partial payment as possible with your personal tax return (1040) when you file your extension. Complete a rough draft of your tax return if necessary, and even If you estimate a little high on what you might owe, it will simply come back to you as a ‘refund’ when you DO file. Not a big deal if you hate paying interest to the IRS.
File your extension (Form 4868) with ANY money you can if you owe. This will minimize the penalties and interest to some degree. THEN start saving up your money and file your Tax Return on time (by October 17th).
In fact, consider borrowing the funds from someone else to pay the IRS (probably not a credit card with crazy interest rates- be smart). However, typically paying a 3rd party reasonable interest for a loan to pay your taxes will be cheaper and certainly less financially stressful.
This is actually a very common situation when taxpayers are a little short. Believe me when I tell you that you’re not alone. Millions of people will file an extension on April 18th and still owe – it’s ok…it’s not the end of the world!
Plan and Estimate the Damage Before the October 17th Deadline
What You Need to Do and Can Expect After You Filing an Extension
Now that you’ve hopefully filed your extension, it is time to put together a plan of attack. Quickly determine how much you ARE actually going to owe so that you know what the ‘damage’ is. IF you can’t pay, there’s no rush to hurry and file before October 17th. The penalties and interest are going to accrue not matter what between now and then. However, MAKE SURE you still file by October 17th.
The reason why I want you to at least ‘prepare’ your tax return is so that you can start thinking about payment arrangements and have a ‘reality check’ as to how much the tax bill will be including penalties and interest. Many times, it’s not as bad as you think and the stress of ‘not knowing’ is far worse than having a figure in mind to work towards.
Finally, if you aren’t able to pay by October 17th, we’re in a whole new set of rules and options. Many people think they can ‘settle for pennies on the dollar’, or if they don’t file the penalties won’t change, OR the extension covers them past October 17th.
ALL of those assumptions are WRONG! Make sure you read my separate Article on owing the IRS after this drop-dead date “What to do If I can’t Pay My Taxes by October 17th?”
Business Extensions and Personal Extensions are Treated Differently
Now, a quick word for you side-hustle or full-time business owners out there. If you had any of the following in 2021, the deadlines to file for an extension are different than your personal tax return:
- S-Corp – The deadline for an extension is March 15th, 2022.
- C-Corp – The deadline for an extension is April 15th, 2022.
- LLC with 2 or more partners – The deadline for an extension is March 15th, 2022.
IF YOU missed any of these deadlines, the penalties and interest will add up quickly! Get on it immediately.
If you simply had a single-member LLC (owned 100% by you), you can file it on your 1040 Tax Return on Schedule C if you received a 1099-NEC for services or sales, a Schedule E if you had a rental property, or Schedule F if you had a farm.
With a pass-thru entity (like a multi-member LLC or S-Corp) any federal penalty is based on the number of shareholders or members, and the months the return is late. For a C-Corporation, the penalty for late filing is a monthly penalty based on the taxes owed or a minimum penalty of $435.
Business owners need to take these deadlines also very seriously and pay attention to the type of business they have and the filing deadline. Please see my separate Article “Do I need to file an Extension for My Business Tax Return by March 15th?” for more detailed information on this topic.
In sum, I know this can be a very complex topic with lots of math involved, so if you are in a predicament and missed a deadline, or owe any taxes whatsoever, get professional help and be cautious of radio or tv ads that ask for money upfront. Please contact an attorney or CPA in our office that can discuss the situation if you need further assistance.
* To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.
Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP.