So what's point in filing an extension if you still have to pay tax?

Three possible scenarios -- first, some folks get most of their "tax stuff" organized and are able to get enough of their return done to get big picture: "Do I owe or am I getting a refund." You do calculations, see where you stand, and if you owe, send in extension form with a payment that's pretty close to final figures.

You may have a few deductions that you need to research, one last shoebox to peruse. You need more time, that's all.

Second, you're running way behind on tax matters this year. Hey, it happens! There's no way you're going to get return done on time, and you know you'll probably owe, so, be sure to file extension, even if you don't know how much you may owe or even if you can't make a payment with extension. The reason? Because there are penalties for late filing and penalties for late payment of tax. By filing extension, at least you avoid late filing penalties.

In short, by filing extension, you can save yourself some money!

The third scenario is even more common -- you know you're getting a refund; you always get a refund. Maybe you're self-employed and your spouse has a W2 job, and spouse's tax withholdings are always enough to cover both of you. And you're in no hurry to get refund.

Which brings me to:

EXTENSION TIP #2:

If you are getting a refund on your personal return, you have 3 years to file return to claim refund, without any fear of a late filing penalty.

That's right. As long as you file your return within 3 years of original due date (for Year 2002 returns due April 15, 2003 -- that would be April 15, 2006), you'll get your refund and there is no penalty for "filing late" -- even if you file after extended due date of August 15.

Bottom line: if you think you may owe, if at all possible, do enough calculating to send in a payment with extension; if you're getting a refund, still send in extension (just to be safe), but relax, you've got plenty of time to get your money back (assuming you didn't need it yesterday!).

Oh, one more thing:

EXTENSION TIP #3:

This article only deals with federal extension rules. State rules vary considerably, so be sure to check with your state's tax department or your local tax professional to get scoop on extension rules for your particular state.

Some states simply piggyback off federal rules. Others don't. So be careful here or you could be penalized severely for assuming that your state's rules are same as feds.

Many Happy Returns!

REASON #3: Having a balance due does not increase chance of audit.

If you have a balance due, you do NOT end up on some IRS "hit list." But for some reason there are many taxpayers who have this unfounded fear of owing money to government. This fear causes people to unnecessarily go to opposite extreme -- "I've got to make sure I never owe, so I'll just have way too much withheld to be safe."

Safe from what? This fear of an audit is pure hogwash.

REASON #4: Getting a large refund is usually a sign of poor (or non-existent) tax planning.

Many folks do not realize how easy it is to get out of "big refund rut".

You have control over how much you pay in to IRS during year. If you or your spouse are W-2 employees, you can change your withholdings very easily. Just file a new Form W-4 with your employer and you won't have to wait so long to get your money back.

If you are self-employed and making quarterly estimated tax payments, same principle applies. With a little number- crunching you can determine minimum amount of estimated tax payments you are required to make.

Whether you are self-employed or work for someone else, if you're not sure how to do these calculations, get help from your local tax professional.

REASON #5: Getting a large refund is usually a sign of poor (or non-existent) financial planning.

My client insisted that he needed a large refund so he could have a nice nest egg to look forward to every Spring. He was using government as his short-term savings plan.

I told Mr. Taxpayer this:

"If you want to save $5,000 dollars over course of year, just authorize your employer to deposit $100 per week into your savings account. Then at end of year, your $5,000 will be sitting in your own bank account instead of at U.S. Treasury.

And you won't be in such a frantic frenzy to get your tax return filed."

So I urge you to reconsider such an approach to money- management. Why let government have your money? Don't wait until end of year to get your money back. With a little planning and self-discipline, you can take control of this part of your life.