Pros and Cons of Tax Extensions
In general, individual and trust income tax returns are due on April 15th of each year, while partnerships and corporations must file by March 15th. If your accountant thinks there is a reasonable chance that you will not be able to file your tax return on time, they will file an automatic request for extension with the IRS and appropriate states to give you additional time to file. Most extensions allow an additional five- or six-months of time to file depending on the type of tax return you have. Extensions must be filed by the original due date of the return.
Why would my accountant file an extension for me?
Here are some reasons your accountant would file an extension for your individual tax return or your business:
- You have not been able to provide all your tax documents to your accountant by February 25 (businesses) or by March 25 (individuals and trusts).
- You receive one or more K-1s from investments in pass-through businesses such as partnerships or S corporations or from trusts.
- You are waiting to receive corrected or amended tax documents.
- An extension was filed for you last year.
There are pros and cons to filing extensions and we will discuss a few of them here.
Pros of filing request for extension
If you are missing information or know that some of the information you have received is inaccurate, an extension will allow extra time to gather your tax documents or get errors corrected. It will give you additional time to review your completed return for potential inaccuracies. As mentioned above, many of the K-1 forms you receive do not get to you until late in the filing season, and an extension will give you some extra, stress-free time to gather all your information.
Filing an extension suspends late-filing penalties. If your return is not filed by its original due date, the IRS imposes late-filing penalties that increase with each month or part-of-a-month the return is filed late. An extension prevents this penalty, unless, of course, you file after the extended due date.
If this filing season is like previous ones, there will be some tax law changes that have not been clarified or finalized by the original due date of the tax return. In this case, filing an extension allows you and your accountant to wait and see how things settle out, and potentially avoid having to file an amended tax return.
Finally, filing an extension does not increase your risk of IRS audit of the return. Some practitioners maintain that extensions may decrease the risk of audit because the IRS has an annual quota of audits and the later in the year the return is filed, the more likely it is that the quotas have been filled. Since the IRS audit procedures are a highly guarded secret, we can neither confirm nor deny this assertion, but we are confident that extensions do not increase your audit risk.
Cons of filing request for an extension
If a pro of filing an extension is extra time, a con is that you have more time to stress about your taxes and more time to procrastinate dealing with them. If you tend to need an extension because you are avoidant about gathering tax information, an extra five or six months will only compound your problem. Ask your accountant to give you some guidance about what is needed and break the process into manageable steps.
Never file an extension because you cannot pay the tax due with your tax return. Extensions give you more time to file your return, but not an extension of time to pay your tax. You will be better off and reduce potential penalties if you make arrangements with the IRS to pay the tax as soon as you become aware there may be an issue.
Occasionally, you will need to provide a bank or other agency with a completed tax return to qualify for loans or substantiate residency. Extensions create a delay in the time your finished return is available.
Finally, if you decide to file an extension, the IRS will be expecting to see a return by the extended due date. If you find that a return was not necessary after all, you will likely have to deal with a notice of non-filing from the IRS. This situation is easily remedied by a phone call or letter to the IRS, but it requires a phone call or letter to the IRS! If you are not sure a return will be required, err on the side of caution by filing an extension. You will be in a better place than you would be if you did not file the extension and have to pay late filing penalties later.
Filing an extension is a simple, inexpensive process. Let us know if you have questions or worries about filing one.
About this Author
Susan is experienced in tax research, not-for-profit taxation, trusts and estates, and sales tax. She has prepared tax returns for pubic charities, private foundations, and charitable trusts as well as unrelated business income tax returns for numerous charities.