The Upside and Downside of Getting a Tax Extension
Filing taxes is never something people look forward to, especially in these busy and uncertain economic times. This is where an extension comes into play – the extension option is about you asking the Internal Revenue Service (IRS) for more time to file your tax return.
Introduction to Tax Return Extensions
The IRS will automatically grant people an extra six months to file their tax returns if they apply for an extension – this means your deadline will be stretched from April 15th to October 15th. And if you own a business, you can get an extension until September 15th.
It’s important to understand however that while an extension gives you more time to file your tax return, this is not a breather on paying your actual tax, which is due by April 18th. What the extension does do is help reduce the IRS penalties if you can’t afford to pay your taxes in full by this deadline.
Applying for an extension is super easy – it’s a case of filling out the IRS Form 4868. You can now also file your extension online, which is a great option because you’ll get a confirmation code that the extension has been granted.
Benefits of a Tax Extension
Extra Time to Organize Your Documents
By applying for an extension, you’ll get an extra 6 months past the normal deadline. This is particularly important if you ‘re waiting on tax documents to arrive in the mail, if you need extra time to organize your tax deductions or if you need more time to file your gift tax return.
Extra Time to Streamline Your Tax Return
Because there’s often a rush to get tax returns filed by the deadline, it’s easy to make mistakes. An extension will give you and your accountant more time to get everything completely accurate.
And if you really want to maximize your tax return, there are a number of decisions to weigh. For example, you might want to take a Section 179 deduction, defer Roth conversion income or carryback any business losses. These elections need to be finalized before the tax return is filed, so by having an extension you’ll have more time to make the right choices.
Reduce Late Penalties
The IRS will impose a standard late filing penalty of 5% per month on any tax you owe them, plus a late payment penalty of a half percent every month. So, if you file an extension and then file your tax return by the deadline of October 18th, you won’t have to pay the monthly 5% late filing penalty. Even if you file miss the October 18th cut-off date, the late filing penalty will begin from that date, so you’ll still get a six month deferral.
Minimize Tax Preparation Fees
Many accountants raise their charges in the weeks leading up to the tax filing deadline, then them during the slow spring and summer months. Changing your tax preparation to a time when their fees are lower will help you save money.
Extra Time for the Self-Employed to Build a Retirement Plan
Filing a tax extension will give you an additional six months to fund a retirement plan. You can get going on this as late as the extended deadline for the previous tax year.
Extra Time to Decide on Your IRA Contribution
As long as your Individual Retirement Account (IRA) is funded by the April tax deadline, you can then choose to reshape it by the extended October deadline. For example, you could change your traditional IRA contribution into a Roth IRA, or the other way around. This helps if you’re unsure whether you’re eligible for a certain type of IRA.
Maximize Your Tax Refunds
As standard, the IRS has a three-year deadline for sending a refund check that they owe you, beginning from the date of your filing deadline (April 18th). With an extension, the refund statute of limitations is also extended by six months, so you’ll receive your federal tax refund even if you fall behind in submitting your tax return.
Disadvantages of a Tax Extension
Tax Payment Cannot Be Delayed Without Penalty
As mentioned above, an extension still means you have to pay the taxes you owe the IRS on time. If you don’t meet this deadline, you will still be charged a late payment penalty at 0.5% per month plus interest (currently at 4%).
Eligibility
Some people just aren’t eligible for extensions. For example, if you were approved for an offer-in-compromise, you’ll need to file your tax return by the standard April deadline during your five-year probationary period – if you don’t do this, the IRS has the power to revoke your offer-in-compromise and re-instate the original amount you owed.
Married Taxpayers
An extension doesn’t allow married partners more time to switch from joint to separate tax returns.
Conclusion
While filing taxes is always a small headache, it can be made much worse if you’re not ready with all your paperwork in order. It’s way better to get an extension than to file a tax return that limits your options or doesn’t add up properly in the eyes of the IRS.
About the Author: Bob Goren is an accountant and independent advisor on filing taxes in the US.
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