Should I File An Income Tax Extension?

Tax season is upon us, and with it comes the stress of filing your taxes on time. For many, meeting the due date can be challenging. But don’t worry– that’s why the IRS offers extensions. Filing an extension can give you extra time to complete your taxes accurately. It’s important to understand the details before you apply. In this blog, we’ll explore the basics of extensions and provide tips to help you decide if it’s the right option for you.

What is a Tax Extension?

Filing taxes is a key responsibility for both individuals and businesses. Fortunately, the IRS allows taxpayers to extend their filing deadline. The process is simple: file the appropriate form and pay the taxes you anticipate owing. There are no fees for filing an extension; in most cases, you won’t need to sign additional paperwork.

Your extension will be automatically approved if the IRS receives the completed form by the original due date. You won’t incur late-filing penalties if you file by the extended deadline. Extensions are available for individuals, businesses, trusts, and estates.

By filing a tax extension, you gain time to ensure you have all the necessary documents for your tax return, helping you avoid costly mistakes and potential IRS penalties. However, remember that an extension doesn’t extend the time to pay your taxes.

Wait… I Need to Pay When I File for an Extension? 

While the IRS allows more time to file a complete return, they still expect timely tax payments. That’s why we recommend getting a projection done before the busy season. A projection can help determine the amount to pay when filing your extension.

If I Have to Pay Now, Why File an Extension? 

Sometimes, filing an extension is unavoidable. Perhaps you’re waiting on a K-1 from a business or an investment. Ideally, the accountant preparing that K-1 can estimate the income reported to you so you can calculate your extension payment.

For small business owners, filing an extension can be particularly beneficial. It provides more time to gather income and expense information for your business and extends the deadline to contribute to a self-employed retirement plan.

For example, let’s say you own a lawn care business, and most of your revenue is generated during the spring and summer months, making cash flow tight during the winter. By filing for an extension, you have until October 15 to contribute to your self-employed retirement plan. By mid-October, you might have enough funds to contribute the maximum to your retirement account. New Individual 401(k) or SIMPLE IRA plans must be set up during the tax year, but you have until the extended filing deadline to make contributions.

How to File a Tax Extension?

If we prepare your return, we’ll also prepare your extension. If we complete a projection for you, we’ll use that information to determine the necessary payment. If a projection was not prepared, please let us know the amount you plan to pay with the extension. 

If we aren’t preparing your return, the IRS website has instructions on filing an extension–search for Form 4868, and don’t forget to check state-specific information for the states where you file. For businesses, search for Form 7004.

Avoid IRS Penalties

Filing an extension gives you more time to complete your federal tax return but does not extend the time to pay any taxes owed. Estimate your tax payment and pay it by the original due date. If you can’t pay the total amount, pay as much as possible. 

The IRS imposes three types of penalties:

•  Failure to File: 5% of unpaid taxes for each month, or part of a month, the return is late, up to 25% of unpaid taxes. 
• Failure to Pay: 0.5% of unpaid taxes for each month, or part of a month, the tax remains unpaid, up to 25%, if at least 90% of the balance is unpaid by the due date. 
• Interest: Charged on underpayments when taxes aren’t paid by the due date. 

What About State Extensions?

State extension rules are generally similar to IRS rules. Most importantly, an extension does not extend the time to pay state taxes. If you anticipate owing money to the state, make a payment by the original due date. 

Bottom Line

Tax extensions can be a helpful way to reduce stress and ensure you file correctly. Although the process requires some effort, the peace of mind it brings is often worth it. If you’re feeling overwhelmed or are struggling to meet the tax filing deadline, you’re not alone. Fill out our tax interest form to see how we can help simplify your tax filing process and keep you on track for success.