Tax Extensions in a Nutshell
Tax extensions can be highly advantageous for many taxpayers. One major advantage is that it allows taxpayers up to 6 additional months to gather all of their tax documents and get their proverbial ducks in a row. Another advantage to consider, especially for individuals and businesses with dynamic and/or changing financial situations, is that extensions provide the time and opportunity to undertake strategic planning to assess, adjust, and forecast financials. The regular tax season can be quite busy for tax preparers as well, so having the time provided by extensions increases the bandwidth to assist clients with strategic planning and advisory services.
There are some common misconceptions that taxpayers should be aware of when filing for tax extensions. One common misconception taxpayers have is that extensions are somehow perceived negatively by the revenue services, or that there will be penalties and fees incurred as a result of filing for an extension. While it is wise to be wary of extending if you don’t really understand what it entails, ITC is here to advise you on the process, explain things in a way you will understand, and make things simple for you.
In general, the most critical issue to understand is that a tax extension changes the deadline for FILING ONLY. Any PAYMENTS DUE REMAIN DUE at the original filing deadline. In order to avoid any One of the services that ITC provides is to work with clients to accurately estimate the tax payments due (if any) prior to filing for a tax extension. In order to make this calculation, ITC will simply need the relevant client documents (W2’s, 1099s, etc.) and/or pertinent information (inheritance, property sale, change in employment, etc.). For taxpayers with simple W2 income, and no significant financial events in the year at issue, this estimate is easy to calculate. Of course, the greater the complexity of the taxpayer’s financial circumstances, the more involved the estimated tax liability calculations will be.
What Are the Potential Concerns with Extensions
As mentioned above, an extension is extra time to file, but not extra time to pay. When you file an extension (Form 4868 for individuals), you are giving yourself an extra six months to file – you still must file your extension by the extension deadline. If not, you may face late filing penalties. You will also face penalties if you file for an extension, but fail to make a payment for the estimated taxes due by the original tax deadline. This is where ITC can alleviate some of these issues.
When we know a client owes taxes, but they need to file an extension (whether it’s due to missing information, client emergency, etc.) we prepare an estimate of what they would owe based off prior years’ information as well as the materials we already have. This allows the client to pay in something at the time of the extension, so they are not penalized by the IRS. If we overestimated the amount, it will rollover into a future refund, and an underestimated amount will have to have the difference paid by the extension deadline.
Additionally, if you fail to file an extension or pay in taxes owed, the penalties can very quickly outweigh what you would’ve been expected to pay in – it is always a better idea to file an extension and pay what you can as opposed to doing nothing at all. Interest starts accruing the day after the deadline – so if you haven’t extended you must complete your return as soon as possible to make sure the penalties don’t stack up too much. Here is the IRS’s page on Extension Forms by Filing Status.
Exceptions: Automatic Extensions
An automatic extension is granted to certain individuals based on special situations. If you are enlisted in the military, and you are serving in a combat zone or a qualified hazardous duty area, you will be granted an extension. There are other special rules that may apply – if you are living outside of the United States, you may also qualify for a special extension. These are all factors that can affect your time to file, so make sure to visit the IRS website and see if there are other circumstances in which you will be granted an automatic extension.
Is an Extension the Right Move for You?
Every situation is different. If you normally receive a refund and typically don’t owe (to the IRS or state[s] of residence) th from extending. It simply gives you extra time to file, and you will not receive your refund until you file. Refunds are available to claim for an additional three years after the time of filing. If you typically owe, whether it is to the IRS or state, you should try and file your return on time, if possible. Unless you are waiting for a form, have extending circumstances, or had a life change that needs to be properly documented, you should try to make the effort to file on time. If this is not possible, we are here to help – you must remember however that it is not an extension of time to pay and you still owe the full amount by the deadline. We are happy to calculate an estimated payment at the time of extending, but we are also advocating for taking advantage of our tax planning services to avoid having to file after the deadline.