If Time Is Running Out, Tax Extension Is an Option
Obtaining a six-month extension to file your personal income tax return is relatively easy, and there are legitimate reasons for doing so; however, there are also a few downsides. If you need more time to file your tax return this year, here’s what you need to know about filing an extension.
An extension of time to file is a formal way to request additional time from the IRS to file your tax return, which, in 2019, is due on April 15. Anyone can request an extension, and you don’t have to explain why you’re asking for more time.
Individuals are automatically granted an additional six months to file their tax returns. In 2019, the extended due date is Oct. 15. Taxpayers should be aware that an extension of time to file a return does not grant you any extension of time to pay your taxes. In 2019, April 15 is the deadline for most people to pay taxes owed and avoid penalty and interest charges.
One misconception is that if an extension is filed, a taxpayer has a better chance of getting audited. This is totally untrue. Being audited is not dependent on when you file your return.
As with most things, there are pros and cons to filing an extension. Here are a few of both:
- You can avoid a late-filing penalty if you file an extension.
- You are able to file a more accurate — and complete — tax return. Rather than rushing to prepare your return (and possibly making mistakes), you will have an extra six months to gather up required tax records, especially if you are still waiting for tax documents that haven’t arrived or need more time to organize your tax documents in support of deductions.
- If your tax return is complicated, then your tax preparer or accountant will have more time to work on your return to make sure you can take advantage of every tax credit and deduction you are entitled to under the tax code.
- If you are self-employed, you’ll have extra time to fund a retirement plan. Individual 401(k) and SIMPLE plans must have been set up during the tax year for which you are filing, but it’s possible to fund the plan as late as the extended due date for your prior year tax return. Simplified Employee Pension (SEP) IRA plans may be opened and funded for the previous year by the extended deadline as long as an extension has been filed.
- Filing an extension preserves your ability to receive a tax refund when you file past the extension due date. Filers have three years from the date of the original due date (e.g., April 15, 2019) to claim a tax refund. However, if you file an extension you’ll have an additional six months to claim your refund. In other words, the statute of limitations for refunds is also extended.
- If you are expecting a refund, you’ll have to wait longer to receive it than you would if you filed on time.
- An extension is for time to file, not for extra time to pay. This is one of the most misunderstood aspects of filing an extension. If you don’t pay a least 98 percent of the tax due by the April 15 deadline, you will be liable for late-payment penalties and interest. The failure to pay penalty is one-half of 1 percent for each month, or part of a month, up to a maximum of 25 percent of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full.
- When you request an extension, you will need to estimate your tax due for the year based on information available at the time you file the extension. If you disregard this, your extension could be denied, and if you filed the extension at the last minute, assuming it would be approved — but it wasn’t — you may owe late filing penalties as well.
Filing an extension is not a negative thing. Just be sure to estimate an amount that you might owe and pay it by April 15 to avoid late-payment penalties. The Internal Revenue Service understands that every tax preparer cannot file every taxpayer’s return in the short two-month period we are provided. There are literally not enough hours in the day, so be kind to your tax preparers!