Posted by Larry Hurt

Tax Extensions: What Are Tax Extensions, and how does it Work?

Tax Extensions: What Are Tax Extensions, and how does it Work?

The IRS allows individuals, businesses, and properties to file an income tax return after the deadline by obtaining an extension. The correct presentation of an extension means that no penalty for delay will be imposed unless the return is submitted within an extended period.

However, this does not extend the time for payment of taxes. If you do not pay the tax receipt before the initial deadline, you may be subject to fines and interest.

Filing an extension on a personal income tax return

If you are pressed for more time to file your tax return, you can complete Form 4868 for another six months. This basic two-part form identifies you and allows you to make an estimated tax payment. In general, you can recover interest for any amount paid, but you will be responsible for interest and possibly penalties for any amount that pays less.

To obtain the extension, you must complete Form 4868 before the tax filing deadline, which is generally April 15 of each year.

Estate Tax Return Extension

Inheritance tax returns must normally be filed within nine months of the death of the deceased. The agent can file Form 4768 to receive an automatic extension of six months to file the property tax return on Form 706.

An executor abroad can request an additional extension of six months for a total of twelve months. However, the second extension is not spontaneous, and the request must be submitted to the IRS before the end of the first extension to allow sufficient time to assess the request.

Extension for US Expatriates 

American taxpayers can receive an extension of two months when they are outside the United States. To be eligible, the primary establishment must normally be located outside of the United States. Or you must be active in the military.

For this extension, file your return within two months of the original expiration date and attach a statement explaining why you are eligible for the two-month extension. Unlike the six-month extension offered to taxpayers residing in the United States, this two-month extension allows you to avoid late fees for two months. However, you will still have to pay interest on the amount of tax that you did not pay before the April deadline.

Extension of Commercial Tax Extensions

A business can get an automatic five-month extension to file an income tax return on Form 1065, and a business that can file an income tax return on Form 1120 can get a six-month extension, provided it has filed a Form 7004 before the initial submission deadline. However, if you are the only owner who prepares Schedule C to report taxable business gains, you can get an extension of time using Form 4868.

The Benefits of Filing for an Extension

    •    You Have More Time To Make More Choices On Your Tax Return: You have to make a wide variety of decisions when preparing your tax return, and you can work a bit and consult a professional to determine if you are truly qualified to receive certain deductions and credits. Completing an extension gives you more time to think or ask for help.

    •    You will have an additional six months: It usually takes longer until the return is complete if you are still waiting for tax documents to arrive in the mail or if you need more time to organize the deductions. The extensions also offer more time to file your declaration of donation if you have been particularly generous during the year.

    •    Improves The Accuracy Of Your Return: There is an inevitable rush to close tax returns before the April deadline, and taxpayers and accountants can make mistakes when filing tax returns. An extension gives you and your accountant more time to review the return and make sure everything is complete and accurate before submitting it.

    •    Maintain Tax Refunds: Some people find themselves a few years late, and there is a three-year deadline to receive a refund check from the IRS, if applicable. This three-year limitation period begins with the initial filing deadline: April 15, 2020, for the fiscal year 2019. But the status of restitution restrictions also extends to six months when an extension takes place. This can protect the capacity of taxpayers to receive federal tax refunds, even if they are late in filing tax returns.

    •    It Gives Entrepreneurs More Time To Fund Their Retirement Plans: Entrepreneurs may wish to fund the SEP-IRA, 401 (k), or SIMPLE-IRA plans themselves. Filing an extension gives these taxpayers an additional six months. Only the 401 (k) and SIMPLE plans should be established during the year, but in reality, the plan can be funded until the extended period of the previous year. Contractors can also open a SEP-IRA for the last year during the extended period, provided they submit an extension.

    •    Helps Reduce Late Penalties: The IRS imposes practically two types of fines: a late payment penalty of 5% per month for any tax due, plus a late payment penalty of 0.5% per month. If you submit an extension and then return within the extended deadline of October 15, you will avoid the monthly 5% penalty. And the late delivery penalty will begin on October 15, which creates a postponement of this fine if it is made after October 15.

    •    Extensions Can Help Reduce Tax Preparation Costs: Some accountants raised their rates in the weeks leading up to the April deadline, and then lowered them again in the spring and summer. Money-sensitive taxpayers can save money by changing their tax preparation at a time when the accountant is less busy and charges a lower rate.

Disadvantages of Filing a Tax Extension

    •    It can confuse the IRS: The IRS may deem it necessary to file a tax return if an extension occurs. If you find yourself without filing the return, perhaps because it does not meet the requirements of the return, then this is not necessary; the IRS may be confused and ask you to file a return because you already filed for an extension to ask for more time.

    •    There is no extra time to fund an IRA: Contributions to a traditional IRA and a Roth IRA must still be paid before the April deadline.

    •    The Additional Delay For Sending Files Does Not Mean A Further Payment Delay: An extension will give you more time, but the original deadline has not yet paid all taxes due. An extension may help reduce fines, but any unpaid balance will be charged a late payment penalty of 0.5% per month and interest.

    •    No Extra Time For Couples To Change Joint Declarations To Separate Declarations: Married taxpayers who filed a joint tax return before the April deadline only has until April 15 to change their tax returns to change the status of a separate tax return.

    •    It Is No Longer Possible To Change An Ira Contribution: Before the Tax and Employment Reduction Act (TCJA) comes into force, you can change the nature of your IRA before the October deadline, provided that your IRA is funded in April. You can convert your traditional IRA contribution to a Roth IRA contribution or a Roth IRA contribution to a traditional IRA contribution, or you can even use this provision to redefine a Roth conversion to a traditional IRA. However, at TCJA, on January 1, 2018, conversions made after this date can no longer be characterized.

Larry Hurt
Contact Member