Many taxpayers have a negative perception when it comes to the idea of filing an extension of time to file their income tax return but there are some benefits. Not only will you extend the filing deadline until October 15, but you’ll also relieve the stress that often accompanies trying to pull everything together by tax time. More time and less stress will allow you to thoroughly review your return and ensure you're taking advantage of all the tax benefits available to you. Below are some of the benefits of filing an extension:
Avoid Penalties
You'll also avoid failure-to-file penalties, which can add up to 25% of the tax due. If you file an extension but miss the extended deadline, you will be subject to this penalty. Keep in mind that filing an extension when you owe taxes only gives you more time to file, not more time to pay—your payment is still due at the tax filing deadline.
Improve Accuracy
An extension will allow you to take advantage of retroactive changes to the tax law that might be made after the filing deadline, without the added time and expense of filing an amendment. Additionally, some tax professionals theorize that filing an extension will decrease your odds of being audited, since IRS auditors must meet quotas and try to do so early in the year. While the IRS does not disclose its process for selecting returns for audit, the earlier a return is filed, the longer it is in the system and thus subject to a review.
Avoid the Chaos of Tax Season
Having more time to file can improve the accuracy of your return. Accountants and taxpayers are both extremely busy during tax season, and it is possible for mistakes to be made. During the tax season rush, many accountants will be overwhelmed and may miss important deductions that could save you money. Filing for an extension can help you avoid the mad rush and will allow you to take your time and make sure your taxes are filed correctly.
Avoid Additional Tax Preparation Fees
Most accountants maintain higher prices during tax season and hike up their prices even more on the week of the deadline. They tend to lower their prices significantly in the late spring and summertime. Filing your taxes with an accountant at that time could cost you much less. Having a tax extension also provides you additional time to make various elections on your tax return, as well as preserve your tax refunds if you file after the extended deadline.
Missing or inaccurate information
You can't file an accurate return if you don't have all the information you need, or if what you have is incorrect. It's not unusual for some information returns, such as a schedule K-1 or Form 1099 arrive too late to allow you to complete your tax return by the filing deadline. The IRS does impose deadlines for filing information returns, but extensions are frequently granted. These extensions can usually be for 30 days or six months, depending on the return.
Financial institutions and investment companies typically send 1099s to their customers to report interest, dividends, capital gains and sale proceeds. These returns often need correction, especially if they are based on information from multiple investments.
How to Properly Request an Extension
Tax extensions forms can be found online. By accurately completing the IRS Tax Form 4868 (for personal tax returns) or IRS Tax Form 7004 (for business tax returns) you will be able to successfully file for your tax extension.
If you choose to submit Form 4868 electronically, you will receive confirmation from IRS once it has been received.
Important Considerations
Make sure to keep the deadline for filing for a tax extension in mind. You will be unable to request an extension once the deadline has passed. Additionally, any income taxes owed are due by the original filing deadline even if an extension is filed.