When filing for an extension, the IRS automatically grants an additional six months to file your personal tax return. This moves the deadline from April 15 to October 15. Filing an extension is not difficult; it only requires that you file IRS Form 4868. However, you should take into account some of these considerations before deciding to file for an extension.
The most obvious benefit of filing an extension for your tax return is for the extra time. This is especially helpful if you are still waiting on certain documents, such as a K-1 or letter confirming a charitable donation.
Reduce Late Penalties
The IRS imposes two basic penalties: a late filing penalty of 5% per month on any tax due and a late payment penalty of half a percent per month. Filing an extension can help you avoid the 5% late filing penalty as long as you file by the extension deadline.
Reduce Risk of Audit
It’s a common misconception that an extension will make you more likely to be audited. The extra time of an extension can allow you to be more thorough and avoid mistakes that would raise red flags to auditors.
Extra Time to Fund a Retirement Plan Contribution
If you are self-employed, it could be in your best interest to file for an extension because it will grant you six more months to fund your retirement plan. As long as Solo 401(k) and SIMPLE-IRA plans are set up during the tax year, they can be funded up until the extension deadline. A SEP-IRA, however, can be opened and funded for the previous year by the extended deadline.
No More Time to Pay
Filing an extension will allow you extra time to file your return, but any tax is still due by the original deadline. An extension doesn’t waive late payment or interest penalties.
Longer Wait for a Refund
Since you can’t claim your refund until you file your return, an extension will increase your wait time.
Same Amount of Work
If you filed an extension out of procrastination, you may face the same time crunch in October. If you don’t actually need the extra time, it might be better to file by the April 15 deadline.
There may be other factors you should consider when deciding if you want to file an extension. Contact us for more information.