Advantages and misconceptions about filing a personal income tax extension
I have encountered many clients who have had misconceptions about filing an extension.
I have had clients who thought that if you an extension, the IRS will be mad, or that they will be more likely to audit you. The IRS doesn’t care anymore whether you file an extension than the police care if you take the interstate. In general, everyone is entitled to file for an extension, and the IRS doesn’t care. In fact, there was a time when you were less likely to be audited if you filed an extension, but this no longer applies. Filing an extension does not increase your chance of being audited.
There are a couple of exceptions which 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.
I have had many clients who thought if you file an extension and file your return after April 15, that you will have penalties. Filing an extension eliminates the late filing penalty.
The IRS imposes two types of penalties. The late filing penalty is the larger penalty and is 5% of the tax liability for each month it is late and a maximum penalty of 25%. The late payment penalty is only a half of percent a month, which is relatively small. You can make a payment with your extension if you want to avoid this penalty. Any overpayment will be refunded when you file your return.
If you know you have a refund or don’t owe taxes, you don’t even need to file an extension for your personal income tax return. 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. However, I would encourage most people to file an extension in case they are wrong and actually do owe the IRS money. Keep in mind that if you file your return more than three years after the deadline the IRS will not give you your refund.
There are advantages of filing an extension.
It gives self-employed taxpayers an additional six months to put money into their SEP retirement which can provide a substantial tax savings.
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 they are 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 the fees after April 15. You may be able to save money by filing after the rush.
An extension may be filed by using Form 4868.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org