Taxes

The pros and cons of filing a tax extension

By filing a tax extension application using IRS Form 4868, you are asking the Internal Revenue Service (IRS) to give you additional time to file your personal tax return.

An extension moves the filing deadline from April 15 to October 15, but it doesn’t give you more time to pay any taxes you might owe on that return.

Is taking one always a success?

Due to the December 2021 tornado, extensions were granted to taxpayers in parts of Kentucky. You can check IRS disaster relief announcements to determine your eligibility.

Approval is usually automatic

Most extension requests will be fulfilled automatically; you don’t even have to explain to the IRS why you need the extension. Simply submit the form.

But file it right: Double check your Social Security number and other information. Misinformation can trigger a rare rejection.

Certain people, such as members of the military serving overseas, receive an automatic extension without having to apply for or file Form 4868.

Pros and cons of requesting an extension

You may not have a choice in some circumstances. Additional time to complete your return is often necessary if you are still waiting for tax documents to arrive in the mail or if you need more time to organize your deductions. However, there are advantages and disadvantages associated with requesting an extension.

advantages

  • Reduce late fees

  • Preserve your tax refund

  • Financing a Self-Employed Retirement Plan

  • Take more time to make choices

  • Improve the accuracy of your return

  • Reduce your tax preparation fees

Cons

  • You won’t buy extra time to fund an IRA

  • You cannot change from married filing jointly to filing separately after April 15

  • Mark-to-Market Choice for Professional Traders Fails

  • You could confuse the IRS

  • You cannot recharacterize an IRA contribution

Advantages explained

Reduce late fees

The IRS imposes two types of late payment penalties: 5% on any tax due for each month or fraction of a month that a tax return is late without an extension request, plus a late payment penalty of 0.5% per month, up to a maximum of 25%.

You’ll only have to deal with one of these if you apply for an extension, and even then only if your return indicates you owe taxes and you don’t pay when you file Form 4868.

You’ll avoid the 5% per month late filing penalty if you request an extension and then file your return before the extended due date of October 15. The late filing penalty will not start until October 15 if you do not file by then

Preserve your tax refund

Some people end up filing several years late, and there’s a three-year window to receive a refund check from the IRS if one turns out to be due. This three-year statute of limitations begins on the original filing deadline for that year (usually April 15).

The refund statute of limitations is also extended by six months when you apply for an extension, which can preserve taxpayers’ ability to receive their federal tax refunds, even if they are behind in filing their tax returns.

Financing a Self-Employed Retirement Plan

Self-employed individuals may want to fund SEP IRAs, 401(k)s only, or SIMPLE IRAs for themselves. Requesting an extension gives these taxpayers an additional six months to do so.

Solo 401(k) and SIMPLE plans must be established during the fiscal year, but plan funding may actually occur up to the previous fiscal year’s extended deadline.

Independent contractors and other self-employed taxpayers can open and fund a SEP-IRA for the prior year before the extended deadline as long as they have filed an extension.

Take more time to make choices

A wide variety of decisions must be made when preparing your tax return. It may take some work and perhaps a consultation with a professional to determine if you’re really qualified to take certain deductions and credits, and if it’s really in your best interest.

Filing an extension gives you additional time to reflect or seek help.

Improve the accuracy of your statement

There is an unavoidable rush to finish tax returns before the April deadline, and both taxpayers and accountants can make tax return mistakes when they are in a hurry and under pressure.

An extension gives you or your accountant additional time to review your return and make sure everything is complete and correct before you submit it.

Extensions also provide additional time to file your gift tax return if you’ve been particularly generous during the year.

Reduce your tax preparation fees

Some accountants and even tax preparation software are free to raise their rates in the weeks leading up to the April deadline, only to lower them again during the slow spring and summer months.

Price-sensitive taxpayers can save money by switching tax preparation to a time when their accountant is less busy and charging a lower fee.

Cons explained

An extension will not solve all of your tax dilemmas. Some deadlines are still set in stone, no matter when you file.

You won’t buy extra time to fund an IRA

Contributions to a traditional IRA and a Roth IRA are still due before the original tax due date (usually April 15), unless you’re contributing to a SEP-IRA.

You cannot change from married filing jointly to filing separately after April 15

Married taxpayers who file a joint return before the April deadline only have until April 15 (unless subject to a disaster relief exception) to amend their tax returns to change to married status. filing a separate return.

Mark-to-Market Choice for Professional Traders Fails

You must make this election before the original due date of April 15 (unless you are subject to a disaster relief exception).

You could confuse the IRS

The IRS will most likely think you have to file a tax return if you request an extension. The agency might ask you to file anyway, because you filed an extension to ask for additional time and then didn’t file, perhaps because they realized you didn’t meet the income requirements.

You may want to file a tax return even if you don’t have to. If you qualify for the earned income tax credit (EITC), which is a refundable credit, the IRS will send you the money even if you don’t owe any tax, but only if you file a return to claim it.

You cannot recharacterize an IRA contribution

You were able to change the nature of your IRA before the extended October deadline before the Tax Cuts and Jobs Act (TCJA) was enacted, as long as your IRA was funded before the April deadline. Essentially, you could convert your traditional IRA contribution to a Roth IRA, or vice versa, or even use this provision to re-characterize a Roth conversion to a traditional IRA.

Unfortunately, conversions made after this date cannot be requalified under the TCJA as of January 1, 2018.

How to file an extension

Extensions can be easily filed online. You will receive a confirmation code from the IRS notifying you that your extension was received if you submit Form 4868 electronically.

Most reputable tax preparation software is also set up to file an extension for you. Otherwise, you can mail Form 4868 to the IRS.

Make sure it is postmarked before the tax due date for that year. You cannot file an extension after that date.

Frequently asked questions (FAQ)

Are there any penalties for requesting a tax deferral?

There is no penalty for requesting a tax deferral, but you are expected to pay any taxes due before tax day. If you don’t pay your taxes on time, you will incur late penalties, but you can avoid these penalties by establishing a payment plan with the IRS.

How do I know if my tax extension was accepted?

As long as you have filed the extension correctly, it will be accepted. The easiest way to confirm that this process is going smoothly is to use a tax software service that will confirm your extension once it is done. If you file on your own, you can call the IRS customer service line (800-829-1040) to confirm that you filed correctly.

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