There are only three valid reasons to file an extension on your taxes, which changes your required filing date from April 15th to October 15th. Unfortunately, I see many people who have filed an extension incorrectly or for the wrong reason that end up getting billed by the IRS for interest and penalties. There is no reason anyone should have to pay penalties for late tax filing since correctly filing for an extension is so easy.

Through my financial coaching, I have encountered many people who are not clear about what they need to do to file an extension. They often do not realize that filing an extension only delays the completion of the paperwork. It is not a way to delay paying the taxes owed. So to clear this up, I want to show you what to do if you fall into one of the three categories of people who could file an extension.

First, a note about the reason you should not file for an extension. Not having enough money to pay your tax bill should never be your reason for an extension. The IRS will not allow it anyway. If you are not able to pay the tax bill, file your taxes on time and ask for a payment plan. Then immediately cut your spending so you are able to make the monthly payments. You will also need to increase the amount of money you are having taken out of your paycheck by decreasing the number of dependents on your W-4, or start sending in quarterly tax payments, so your taxes won’t be underpaid in the future.

1. Missing data

The first valid reason for filing an extension is you are missing data needed to complete your tax return on time. This could be because one of your investments is delayed in sending you your K-1. This is the only reason I have ever had to file an extension. All companies are required to send out their K-1s by March 15th so their investors can complete their taxes on time. But occasionally a company does not adhere to their deadline, thus preventing their investors from completing their taxes on time.

Some investors are tempted to file their taxes without the K-1, knowing that their taxes are incomplete. Then when they receive the missing K-1, they file a corrected return. Don’t do this. Do your best to always file a correct return. If you have missing information, file an extension, pay the amount of taxes that you think you owe, get the needed information, and file your tax form correctly the first time.

2. Out of the country

The second reason for filing an extension is you will be out of the country. I travel a lot now, and I ran into a guy on a cruise who had been on seven world cruises. These cruises last 6-7 months. He left home in November and wouldn’t be home until May. I asked him how he handled getting his taxes done on time while he was cruising. I made sure that the cruise I booked would end in time for me to be home to get my taxes in by April 15th. He told me he doesn’t worry about scheduling his traveling around April 15th because he always files for an extension. Then whenever he gets home, he takes care of his taxes.

I had always been so hung up on being sure I got home to file my taxes, this news was a breath of fresh air. This year I ended my snowbirding trip, so I was home in enough time to complete my taxes. I should have filed an extension and stayed on my motorhome trip until I was ready to come home.

If you live abroad, like in the military or your work takes you to another country, you will be granted an extra two months to file your taxes. Your due date is June 15th. You simply check the box on line 8 of form 4868, and your new due date is June 15th. Be sure you read the instructions to confirm you meet the qualification to fit into this category.

3. Major life event

The third valid reason to file an extension is something unexpected happened, and now you don’t have the time to get it done by April 15th. This should not be because your usual schedule is very busy. We are all busy. You will also be busy after April 15th, so plan on getting the work done on time. I am talking about a surprise, like your father had a stroke and you need to fly to your home town to help out. It is a huge burden that couldn’t have been expected, and it happened in March, and now you will not be able to meet the April deadline. If an emergency happens, file an extension and deal with your emergency. When the emergency is over, file your taxes as soon as you can.

If you have one of the three valid reasons to file an extension, here is what you need to know.

You only need to do two things to get an extension: First, you need to fill out form 4868 shown below. You can either file this electronically or mail in a paper form. If you mail it in, be sure you get a receipt from the post office so you can prove that you sent it to the IRS by the April 15th deadline.

The second thing you need to do is to pay your expected taxes. This is calculated on lines 4-7. Line four is what you expect to owe for taxes on your completed tax return. Line 5 is what you already paid through payroll deductions or quarterly tax payments. Line 6, balance due, is the difference between lines 4 & 5. Line 7 is the amount you are paying. If you send in less than the figure in line 6, you are likely to incur penalties. If you can’t pay the full amount, request a payment plan.

Filing for an extension, does not give you a grace period, enabling you to pay your taxes late. You still need to pay your estimated taxes on time. For this, you will need to do a quick estimate of the taxes you think you will owe and put that number on line 4. Then later, when you submit your tax return, if your tax estimate was low, you may still owe penalties for underpayment. The payment you make on line 7 when sending in the 4868 will be listed on your 1040 Schedule 5 on line 71 (see below) when you complete your taxes.

The way to avoid penalties is to be sure you have paid at least 90% of what you will owe, or 110% of what you paid last year. If you have to pay a penalty for underpayment, it will be 0.5% per month, from April 15th, on the unpaid balance.

If the IRS thinks you made an unreasonable estimate on line 4 of form 4868 and paid way too little, they reserve the right to disallow your extension and assess not only the interest on the money you owe, but also a late-filing penalty, which is 5% per month on the money you owe them. So be sure you make a good faith effort to estimate your tax burden and pay it by April 15th. The paperwork can be done later. If you live in a state with income tax, don’t forget to submit a request for an extension to your State filing agency. I won’t cover it here since each state is a little different.

The times I have requested an extension have been very painless. I just told my CPA to give me a best estimate of my taxes and send in the form. I then sent in a check for the taxes I owed and we patiently waited for the delinquent K-1 to arrive and completed my tax forms upon its arrival. It was a very easy process.

How about you? Have you filed for an extension? Was it painless? I think I will stop worrying about being home for tax time if a great travel opportunity comes along. I’ll just keep traveling and file an extension.

Cory Fawcett is a general surgeon and can be reached at his self-titled site, Dr. Cory S. Fawcett.  He is the author of The Doctors Guide to Starting Your Practice Right, The Doctors Guide to Eliminating Debt, and The Doctors Guide to Smart Career Alternatives and Retirement.

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