Benefits of filing an extension
There are several advantages of filing an extension.
It can improve the accuracy of your return. With the rush to get tax returns finished by the April deadline, taxpayers and accountants can make mistakes when rushing. An extension gives time to make sure everything is complete and accurate.
Extensions can reduce your tax preparation fees. Some accountants raise their fees as the April deadline approaches and lower them after April 15. You may be able to save money by filing after the rush.
Filing an extension gives self-employed taxpayers an additional six months to put money into their SEP retirement, which can provide substantial tax savings.
I had clients who thought they had provided all their income when I prepared their tax returns. But unfortunately, they had overlooked sources of income. The missed income is often a 1099-R from their retirement or a missed 1099-NEC when they are self-employed. Filing an extension gives you enough time to retrieve your wage and income transcripts from the IRS. This ensures that all sources of your income are being reported on your tax return. Wage and income transcripts aren’t available from the IRS until after April 15. Your wage and income transcripts can be accessed from the IRS website, or you can have your tax professional retrieve them. Filing an extension provides you with enough time to access your IRS transcripts.
Many people believe the myth that filing an extension increases your chances of being audited. In fact, there was a time when you were less likely to be audited if you filed an extension, but this no longer applies. In general, everyone is entitled to file for an extension, and the IRS doesn’t care.
Filing an extension does not increase your chance of being audited. However, a couple of exceptions do not allow you to file an extension. If you previously signed up with the IRS for a special program for paying past due taxes, and have committed to filing by April 15, or if you have filed for bankruptcy, you may need to file by April 15.
Filing an extension eliminates the late filing penalty. The IRS imposes two types of penalties. Any penalties are a percentage of the amount you owe. If you don’t owe taxes, there is no penalty, since any percentage of zero is zero.
Filing an extension gives you an additional six months to correct your return with a superseded return. A superseded return is treated as your original return. If you accidentally fail to report some of your income, the IRS can charge the Accuracy-Related Penalty. The penalty is 20% of the portion of the underpayment of tax that happened because of negligence or disregard. A timely and properly filed superseding return will be treated as the original return for the tax period. It eliminates the possibility of the Accuracy-Related Penalty if you correct the return by October 15.
An extension may be filed by using Form 4868.
David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at email@example.com.