What Taxpayers Should Know About Tax Extensions

Tax Day (April 15th) is fast approaching. If you’re a procrastinator, don’t have all of your documents ready, or won’t have time to file your taxes by the deadline, a tax extension can give you more time to get everything ready.

“If there were ever a year to consider extending, this would be it. The complexities associated with the Tax Cuts and Jobs Act are impacting many tax filings, and we have found that there are still many unanswered questions. Guidance from the Treasury is still coming out and more is expected. In some cases, taxpayers are required to make decisions about their filings, and they may not have all the information that they need to make those decisions. In other cases, where there is adequate guidance, we believe that taxpayers may benefit from just taking additional time to consider the new law, its implications, and how best to comply,” says Douglas Farrington, CPA, Marcum, LLP Office Managing Partner.

According to most of the experts we spoke to, the most important thing to keep in mind with tax extensions is that it is only an extension for filing your taxes, not paying them.

Read on to hear what experts have to say about the following tax extension topics:

• Tax extension basics
• Advantages and disadvantages of a tax extension
• Federal tax extension tips for individuals and businesses
• State tax extensions

Tax extension basics

Jeffrey A. Schneider: Enrolled Agent, Certified Tax Resolution Specialist, Advanced Crypto Tax Expert, National Tax Practice Institute Graduate Fellow

“An extension protects taxpayers from being charged the late filing penalty which can be, for individuals, 5 percent per month of the tax due. It should be noted, though not a good practice, that if the individual taxpayer will not owe tax with the return, an extension does not have to be filed as penalties and interest are assessed on what is owed with the return. However, if the taxpayer miscalculates where they think they will get a refund and then owe, not filing the extension can cause them penalties and interest.”

Andrew Schrage: MoneyCrashers CEO

“The IRS allows for a 6-month extension on filing taxes. However, this does not apply to paying taxes, only the actual paperwork. This means you still need to pay an estimated amount of how much you owe by the April deadline in order to avoid late penalties. Anyone can apply for an extension. You don't need to provide a reason for requesting one. The IRS won't ask why. They will only contact you if your extension request is denied. If you don't hear from them, you can assume it was approved. You can file for an extension via mail, electronically on the IRS website, or by paying the approximate amount you owe and sending in your tax return later.”

Advantages and disadvantages of a tax extension

Ines Zemelman: EA for Taxes for Expats

“There are no disadvantages for the taxpayer. The IRS does not examine the taxpayer more if the return is filed with an extension.”

Douglas Farrington: CPA, Marcum, LLP Office Managing Partner

“Unfortunately, many people perceive that extending increases the risk of audit and are therefore opposed to it. Honestly, in all my years of practice, I have never known an audit to occur as the result of filing an extension. I do not believe that there is any downside to requesting an extension, particularly in a year when so much has changed. Taxpayers should make sure that they take the time needed to properly assess the new law and the impact it has on them.”

Jacob Dayan: CEO of Community Tax and Finance Pal

“From illness to financial hardship, a taxpayer may file an extension if they feel they need to for any reason. Taxpayers may submit an IRS Tax Form 4868 – Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Taxpayers may submit the form themselves or through a professional before the last day to file taxes, which will extend the time to file for six months. It’s important to note that this is an extension to file the taxes and not an extension to pay any due taxes. Meaning if you owe any taxes pay them by the due date, or you’ll face penalties and fines.
 
State extensions vary by state. Some offer automatic extensions, while others require you to request the extension. They generally offer the same benefits of federal tax extensions.”

Joshua Zimmelman: Westwood Tax and Consulting, LLC President

“Filing for an extension protects taxpayers by giving them more time to make sure their tax return is correct and make sure that they understand any new tax laws. Providing incorrect information on your tax return could result in fines, penalties, or an audit so if you’re not sure about the details, it’s better to file for an extension. An extension also gives taxpayers an opportunity to take advantage of retroactive tax laws changes that take place after April. Of course, they could always file an amendment after the fact if any law changes apply to them after they’ve already filed their return, but an extension helps them avoid the extra trouble (and expense) of doing so.”

Individual federal tax extension tips

Riley Adams: CPA, Senior Financial Analyst and blogger for youngandtheinvested.com

“The IRS allows all taxpayers to file an extension with Form 4868. Doing so allows for up to six months of extra time to file your completed return. This year, that 6-month extension due date falls on October 15.
 
One major caveat of filing an extension, however, is you must still pay the estimated amount of taxes due. Even if you’re granted the extension, Uncle Sam wants his money. There’s a bit of wiggle room in the rules, however. If the taxpayer remits 90 percent or more of the taxes owed with the extension request, the IRS will likely waive the failure-to-file penalty. This is assuming the taxpayer pays any remaining balance by the extension due date, of course.
 
Also, when filing an extension request, you should also pursue filing an Installment Agreement Request. This allows the taxpayer to receive an additional 120 days to pay the IRS in full. If the taxpayer pursues this route, it also lowers the associated interest charges and fees for paying your tax bill late. Under this arrangement, taxpayers can make monthly payments for as low as $25 and extend repayment for up to 72 months.”

Jeffrey A. Schneider: Enrolled Agent, Certified Tax Resolution Specialist, Advanced Crypto Tax Expert, National Tax Practice Institute Graduate Fellow

“If you are an individual (versus partnership, corporations, etc.), your extension has to be filed by April 15th of each year. However, if you live in Washington, D.C., that date is extended one day as the 15th this year is Emancipation Day, a holiday in our nation’s capital. 

If you live outside of the country, your extension is due June 15th.  You file the extension, electronically or by mail (hopefully via certified mail) using form 4868. 

Taxpayers have to remember, that the extension is to extend the filing due date, not the paying of taxes. If the taxpayer(s) believe that they will owe taxes with the return when filed, they should pay their best estimate with the extension in order to avoid at least minimize late paying penalties and interest. Most, if not all, professional tax preparers can take care of this for the taxpayer, but of course taxpayers can do it themselves.”

Business federal tax extensions

Jeffrey A. Schneider: Enrolled Agent, Certified Tax Resolution Specialist, Advanced Crypto Tax Expert, National Tax Practice Institute Graduate Fellow

“If you are taxed as a “calendar year” (meaning your tax year ends on December 31st) business (partnership, S-corp), the extensions are due by March 15th. If you are a trust or C-corp your extensions are due April 15th unless you have a different fiscal year end than calendar. Then, generally, extension is due by the 15th day of the fourth month after the close of your year.

Business extensions, like the individual extension, can be filed electronically by mail. They need to use form 7004 to file their extension. For C-corporations that may owe tax, the same rule applies to them as individuals. They should pay their best estimate with the extension to avoid or minimize late paying penalties and interest. Most, if not all, professional tax preparers can take care of this for the taxpayer, but of course taxpayers can do it themselves. Generally, individual, S-corp and partnership extensions are for six months. Corporations are for five.
 
Calendar year not for profits returns are due May 15th and their extension is for four months, with another two allowed with a subsequent filing.”
 
Scott Roelofs: RCG Valuation & Monetization Owner

“As the tax deadline approaches, the number of options available to your business falls quickly. One option that the taxpayer still has is filing an extension for your company. Many people know this option can buy you some time, but it may actually save your business money. Not only does filing an extension give the taxpayer an extra six months of time, it also gives the taxpayer an extra six months when looking backwards at previous years.
 
There is no doubt that the Tax Act of 2017 has benefited small businesses, especially ones investing in the United States. One thing it did fall short of was simplifying the tax code. If anything, they are a little bit more complex. Many small businesses may not take advantage of all the new deductions or credits available to them. With that being the case, many companies may find themselves filing amended returns somewhere down the line. This is where the extension can come in handy.
 
Let’s look at an example. In May of 2018, you did an analysis of your business and discover that your business has qualified Research and Development (R&D) expenses of $1 million per year dating back to 2014. Your business would be able to claim those expenses in the form of a credit, approximately $70,000, by filing amended returns for each of the previous three years. This is where the extension can save your business money.
 
If the business files their taxes on time with no extension, the last year the business could amend would be 2016, as the May 2018 analysis is more than three years past the April 15, 2015 filing. If however the business had filed an extension, the business would be able to file amended returns for all years:  2015, 2016 and 2017. In this case, the extra six months from the extension would have allowed the business to claim the $70,000 credit for 2015. Imagine having a conversation about forfeiting $70,000 with your tax professional three years from now. It’s our experience that business owners prefer to avoid such conversations, so planning for the future now may be warranted.
 
My example may seem like an extreme case, but given the numerous changes in the tax code and the amount of time tax professionals have been able to dedicate to mastering those changes, it is possible that something could be missed. As a form of inexpensive insurance, it might be advisable to give your business the extra time it may need to claim properly earned deductions and/or credits.”

State tax extensions

Joshua Zimmelman: Westwood Tax and Consulting, LLC President

“Each state has its own requirements for filing for a state tax extension. In some states it will be automatic when you file for your federal extension. Other states make you file a separate state-specific form. Some states don’t require you to file a tax return at all, so an extension wouldn’t be necessary.”