Today (April 17th, 2018) tax returns are due in to the IRS. There will be a mad scramble from all of the procrastinators to get taxes filed on time.
But what if they didn’t need to? What if there was a way to give yourself more time?
Thankfully, there is. It’s called an extension.
What Is A Tax Extension?
An extension is simply a way of informing the IRS that you need additional time to file your tax return, in which the Internal Revenue Service will grant you a one-time extension for 6 months.
The important thing to note here is the extensions are different for personal income taxes vs. business income taxes – though both can officially file a request for an extension.
The deadline for a personal extension, which is what most people are going to want to file, is April 17. You must file your extension on or before this date or not only will you likely not get an extension, your taxes will be late!
If you do file the extension in time the new deadline for filing your tax return will be October 15th, 2018. That’s a full 6 months to get your tax return in order and file.
For businesses the new deadline will be September 15th, 2018 – a month shy of a personal tax extension.
Make no mistake, and extension is merely for the paperwork. Not for payment. This means that filing a tax extension, whether business or personal, does not allow you to pay your taxes due at a later date.
Instead, you must remit your payment immediately and request to send the corresponding paperwork that backs up your payment (i.e. the tax return) at the later date.
Why Would I File An Extension?
There a number of reasons why you would want to file an extension. The biggest reason tends to be time. Many people have complicated tax returns and an even more complicated life. Balancing work + family + tax deadlines can often be a little too much to ask.
This is one of the reasons the tax extension was created, to give American’s more time to complete an accurate tax return.
Another reason to file would be to decrease possible penalties for late payment: Of the two basic penalties the IRS typically imposes: a late filing penalty of 5 percent per month on any tax due plus a late payment penalty of half a percent per month.
If you file an automatic extension and make sure to file by the new deadline of Oct. 15th you’ll avoid the 5% per month late filing penalty. However, if you miss the October 15th deadline, the late filing penalty will go into effect as of October 15th.
It’s still deferred, but it’s not exactly a good thing. You definitely want to avoid the late filing fee!
Another common reason for tax extensions could come down to the person doing your taxes, such as the tax preparer. Often, if it’s a complex return and you’re not expecting a refund, the tax preparer might offer to file a request for an extension to give them more time after the busy tax season to work on your return, or gather more information you may not have provided.
Sometimes this tactic can also give you a lower rate from your tax preparer as it allows them to free up time to work on “easier” tax returns and make more money. Quite often tax prepares raise their rates in the month leading up to the original filing deadline in April and one way to avoid paying these high fees is to allow them to request an extension and do it later.
It’s completely your call.
Beware of the lazy tax preparer, though. If their gut instinct is to request an extension for a personal return even if you have all of the required paperwork in place, chances are they might be in over their head with their current client load or just too busy to ensure that everything is accurate and on time.
Filing an extension is fine if you need the extra time, but if you don’t need the extra time and there are no cost savings in doing so it’s almost always better to file on the original due date unless you can’t pay your taxes and want to decrease or defer certain penalties.
Can Anyone File A Tax Extension?
While almost everyone can request an extension, those that were approved for an Offer In Compromise (OIC) any time in the last 5 years must file by the original tax deadline in April. This is part of a probationary period and you would have agreed to this during the OIC process.
How To Request An Extension
Filing an extension is no sweat. The IRS actually makes it fairly easy to do for anyone, whether for personal or business returns.
Individual taxpayers can file an extension using Form 4868. If filed online the IRS will give you a confirmation code, which is super helpful to keep as a receipt of your request.
Businesses can request an extension using Form 7004. All of the same applies. If filing online you’ll get a confirmation code.