Why people are just now filing their taxes and getting away with it
October 15, 2013 will be the second tax day of the year. It is the deadline for those taxpayers who successfully filed for an extension before April 15.
Why can they file their taxes 6 months later? Is there some special service that grants them the privilege of avoiding the IRS for an additional 6 months?
There is no special service. They merely filled out Personal Income Tax Extension Form 4868, and as long as they sent in the form before the original filing deadline, their request was automatically granted. No magic.
Along with the form, they might have sent additional money to pay their estimated tax obligation. You are not required to send any money when you file for an extension, but there are a number of restrictions on the fiscal breaks awarded by the extension request.
Why not to file an extension request unless you really need the extension
Whereas the extension is automatically granted, this does not mean that the late filing penalty and late payment penalty normally assessed goes away. Unless you can successfully argue a good reason for being delayed on filing, you will be required to pay the penalties and interest anyway – up to the day you file your taxes.
The catch is: you will not know whether the late fees will apply until you file your tax return. The extension is automatic. No one looks at it. But your argument could be reviewed by an IRS official when you send it in with your final tax return.
This means you will not know whether the late filing and late payment penalties will be assessed until you file your taxes. The late filing penalty, alone, is worth 5% of the amount due on your return per month of late filing. After 60 days late, you will pay the greater of $135 or the 10% of your back taxes.
By the time your friend files in October, a rejected excuse would incur the maximum 25% penalty. On a tax obligation of $1,000, the penalty costs an additional $250, not to mention the late payment penalty.
So unless you really cannot file and have adequate reasoning, the extension does very little to help you.
So the next time one of your friends boasts about their late filing deadline, be sure to ask what reason they provided for the extension. And you might want to follow-up in a couple of months to see whether the IRS accepted their excuse, or hit them with the penalties anyway.