Posted by The TaxAdvocate Group, LLC

The Advantages & Disadvantages of Filing a Tax Extension Request

The Advantages & Disadvantages of Filing a Tax Extension Request

Applying for a tax extension using Internal Revenue Service Form 4868 requires the Internal Revenue Service (IRS) to give you more time to file your tax return.

An extension changes the filing deadline from April 15th to October 15th but does not give you more time to pay any tax you may be required to pay on that return.

Is taking a tax extension a good move? 

This year (2021), most taxpayers benefited from an automatic extension of tax registration and payment. All personal income tax returns expire on May 17th, 2021, instead of April 15th. New Jersey, New York, and Mississippi were affected by Hurricane Ida; the filing date was extended to January 3rd, 2022.

Approval is usually automatic.

Most extension requests will be automatically accepted; you don't even need to explain why you need an extension to the Internal Revenue Service. Simply file the form.

Ensure to file it correctly: double-check your social security number and other information. Misinformation can trigger rare rejections.

Some people, such as military personnel serving overseas, are granted an automatic extension without requesting or completing Form 4868.

If you still decide to apply for an extension in 2021 and you were affected by Hurricane Ida, you have until January 3rd, 2022.

Pros of Filing an Extension

You may not have a choice in certain circumstances. You often need more time to complete your tax return if you are still waiting for your tax documents to be mailed to you or if you need more time to settle your deductions. However, there are advantages and disadvantages to requesting an extension.

  • Additional Time to make Elections: When preparing your tax return, you have to make a wide variety of decisions. It may take some work to determine if you truly qualify for certain deductions and credits and if it is truly in your best interest. Sending an extension gives you more time to think about it or ask for help.

  • Funding a self-employed Retirement Plan: Self-employed people may want to fund SEP IRAs, only 401(k) or SINGLE IRA plans for themselves. Applying for an extension gives these taxpayers an additional six months to do so. The Solo 401(k) and SIMPLE plans must be in place during the fiscal year, but in reality, plan funding may occur until the extended end of the previous fiscal year. Independent contractors and other independent taxpayers can open and fund a SEP-IRA for the previous year before the extended deadline, provided they have submitted an extension.

  • Improves return accuracy: There is a certain rush to file tax returns before the April deadline, and taxpayers and accountants can file tax returns when they're in a rush and under pressure. An extension gives you or your tax professional or accountant more time to review your return and ensure everything is complete and correct before filing it. Extensions also provide more time to file your tax return if you've been particularly generous during the year.

  • Keep your Tax Refund: Some taxpayers end up claiming a few years late, and there is a three-year period to receive a refund check from the Internal Revenue Service if one is late. This three-year limitation period begins when the initial filing for that year expires (usually April 15th). The limitation period for refunds is extended by six months, even when an extension is requested, which can maintain the ability of taxpayers to receive federal tax refunds even if they are late in filing returns.

  • Reduce Late Penalties: The Internal Revenue Service imposes two types of late payment penalties: 5% of any tax payable for each month or fraction of a month in which a tax return is filed late without requesting an extension, plus a penalty of 0.5% per month, up to a maximum of 25%. You will only have to deal with it if you request an extension, and again only if your return shows that taxes are due and you did not pay when you completed Form 4868. You will avoid the 5% monthly penalty by requesting an extension and then completing the return form by the extended deadline of October 15th. The late filing penalty will not begin until October 15th if you do not file the return by that date.

  • Reduce tax preparation costs: Some tax professionals and even tax preparation programs may increase their rates in the weeks leading up to the filing deadline, only to lower them again during the sluggish spring and summer months. Price-sensitive taxpayers can save money by doing their tax preparation when their accountant is less busy and is charging a lower rate.

Cons of Filing a Tax Extension

An extension will not solve all of your tax dilemmas. Certain deadlines can't be affected regardless of when you file your return.

  • An IRA cannot be re-characterized: You successfully re-characterize the nature of the IRA by the October deadline before the Tax Cuts and Jobs Act (TCJA) came into effect, provided the IRA was funded before the April deadline. You can convert your Roth IRA to a traditional IRA contribution, or vice versa, or use this arrangement to recharacterize a traditional IRA contribution to Roth IRA. Unfortunately, under TCJA, conversions made after the extended date cannot be re-characterized.

  • No additional time to fund an IRA: Contributions to a Traditional IRA and a Roth IRA must be paid before the initial tax deadline (usually April 15th) unless you are contributing to a SEP-IRA.

  • The transition from a joint return to separate married returns: Married taxpayers who file their tax return before the April deadline only have until April 15th (unless you are subject to a disaster assistance exception) to amend their tax return and switch to the married filing separately status.

This may confuse the Internal Revenue Service: Most likely, the Internal Revenue Service considers that you must file a tax return if you are requesting an extension. The agency may ask you to file anyway because you filed an extension to ask for more time. Ultimately, you didn't file, maybe because you realized you do not meet the income rules. You may decide to file a tax return, although you don't have to. If you qualify for the EITC (Earned Income Tax Credit), which is a repayable loan, Uncle Sam will send you the money even if you don't owe tax, but only if you complete a tax return that demands it. This is especially true for 2021, when the US bailout expanded eligibility for the Earned Income Tax Credit in response to economic hardship caused by the COVID-19 pandemic.

Is there a penalty for filing a tax extension?

There is no penalty for filing for a tax extension, but you must pay all taxes due before the tax day. If you don't pay the taxes on time, you will have to pay late fees, but you can avoid these penalties by establishing a payment plan with the Internal Revenue Service.

How do I know if my tax extension has been accepted?

If you have successfully filed the extension, it will be accepted. The safest way to confirm that this process is working properly is to use the services of a tax professional or a tax software service that confirms your extension as soon as it is processed. If you are filing your request yourself, you can call the Internal Revenue Service customer support line (800-829-1040) to confirm that you have filed the request correctly.

How to file a tax extension

Tax extensions can be easily downloaded online. You will get a confirmation code from the Internal Revenue Service notifying you that your extension has been received by submitting Form 4868 electronically.

You can submit Form 4868 to the Internal Revenue Service.

Make sure it's postmarked by the tax deadline for that year. It is not possible to file an extension after this date.



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