When and why should you file for an extension on your tax return? Our article below gives four reasons, plus extension pitfalls, instructions for how to file for an extension and an explanation of automatic extensions available to some taxpayers.
Extensions can help prevent mistakes on tax returns, avoiding problems like penalties, wasted time, frustration, filing amended returns and even audits. Extensions can also allow more time to receive forms that traditionally arrive late, like corrected 1099 forms and K-1 forms. They can help participants beef up their SEP IRA contributions. One thing a tax extension can’t do is prevent fines and interest, since the payment deadline is April 15th regardless of whether a taxpayer files an extension. Filing for an extension is easy and some taxpayers, like those working or stationed outside the country, may receive an automatic extension without having to file.
People thinking about filing for an extension on their taxes should consider the following:
1. Extensions Greatly Reduce Penalties and Interest
Regardless of whether a taxpayer files an extension, their tax payment still must be postmarked or sent electronically by the regular tax filing deadline of April 15th every year. Late payment penalties are generally half a percent of the amount owed per month, and interest is 3% each year, compounded daily.
The good news here is, fines and interest due to late payment are a lot lower than those for late filing. That means the penalties and interest for someone who files for an extension are considerably lower than someone who fails to file for an extension, even if both parties pay their taxes late.
Extensions give taxpayers an additional six months to file their taxes. That means someone filing for an extension in 2015 has until six months after the normal filing deadline of April 15th. That gives anyone filing for an extension in 2015 until October 15th to file their taxes.
Someone who files for an extension in 2015 and waits until October 15th to pay their taxes will have to pay penalties and interest. However, the amount will be greatly reduced. Let’s say a man files for an extension, does his taxes in October, and finds out he owes $2,215. He pays the money faithfully when he files his tax return on October 15th. However, with a penalty of .5% per month and interest of 3% annually, compounded daily, the man now owes $2,322. Five percent more than he would have paid otherwise.
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Now let’s imagine a woman who also files her taxes on October 15th. Like the man in the example above, she also owes $2,215 in taxes. The difference is, she never bothered to file for an extension. She must pay not only the late payment penalty but also the late filing penalty – a much larger fine. The late filing penalty of 4.5% per month plus the 3% interest charge means that by the time she files her tax return, the woman in our example owes $3,003. That’s a whopping 36%, or 31% more than the man who filed for an extension. The worst part for the late filer is, it would’ve only taken her five or ten minutes to file for an extension.
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A good idea for someone who wants to file for an extension is to make an estimated tax payment on April 15th along with the extension. A check can be included in the same envelope as the extension form. Alternately, taxpayers can pay with the Electronic Federal Tax Payment System (EFTPS) either online or by phone.
2. Extensions Help Prevent Mistakes
Filing for an extension on taxes can mean more time to get things done, and that can mean less mistakes. Filing for an extension is easy, takes relatively little time and doesn’t increase audit risk. By contrast, filing an incorrect return can cause all kinds of problems. A return that contains mistakes can boost the chance of an audit. It can also result in penalties and interest and a lot more work for the taxpayer, requiring the filing of an amended tax return with form 1040x. Filing a form 1040x can be confusing and time consuming.
3. Extensions Allow More Time for Corrected Forms
Taxpayers who get a form 1099 or schedule K-1 from investments or business can often benefit from filing for extensions. The law says IRS forms 1099-S, 1099-B and 1099-MISC have to reach their recipients by February 16th in 2015 and 2016. However, corrected 1099 forms can arrive much later, changing the taxpayer’s tax situation. Likewise, taxpayers don’t always know they’ll get a schedule K-1 until it arrives in the mail, and K-1 forms aren’t due until the middle of March. The late deadline can often cause problems for taxpayers who must then scramble to fix their taxes on time. With spring being a busy time for many seasonal businesses, there’s added pressure and even more reason to wait.
In a case where corrected forms and late-deadline forms arrive much later in the year, the early bird gets to file an amended tax return, while the patient taxpayer gets rewarded with a lot less hassle. In this case, an extension is the way to go.
4. An Extension Could Help You Beef up Your IRA
Contributions to traditional IRAs and Roth IRAs must be made by the tax deadline for the year, without taking extensions into consideration. For that reason, filing an extension won’t help with deadlines for most kinds of IRAs. An SEP IRA or “Simplified Employee Pension” IRA however, has different rules for contributions. Taxpayers whose employers file for extensions have until the company’s extended tax filing deadline to fund their SEP IRAs. The extra time can give someone a nice buffer to amass enough cash to fund their SEP IRA up to the max.
How to File for an Extension
Those who want to file for an extension should complete and submit IRS form 4868. The good news is, the form is really easy to complete and there are several easy ways to do it. See our article on how to file for an extension for specifics on how to file and also for details on which taxpayers get automatic two month extensions, like those working and living out of the country and active military members stationed abroad.
Article Source: Extension of Time to File Your Tax Return: IRS.gov