Extension Apprehension: The Truth About Tax Return Extensions
April 7, 2015
The Truth About Tax Return Extensions
Many taxpayers have their tax return due dates "extended" beyond the annual April 15th filing deadline, with extensions valid until September 15th for businesses and trusts, and until October 15th for individuals.
Myths About Extensions
Taxpayers may have misconceptions about extending their tax returns. The two most prevalent myths about putting a tax return on extension are:
Myth #1 "If a taxpayer extends their tax return, it will increase the chances of being audited by the IRS."
This is absolutely not true. In fact, filing for an extension could reduce the chance of an audit, because there is less likelihood of leaving out information — such as an overlooked Form 1099 from the bank — that could lead to a mismatch between the tax return and the IRS records. The IRS automatically grants an extension for correctly and timely filed extension forms (Form 4868 for individuals and Form 7004 for businesses and trusts.)
Myth #2: "If the tax return is extended, then any taxes owed are not due until the extension deadline."
The extension is for the time allowed to file, not the time allowed to pay. If a tax return is extended, a good faith estimate of what is due has to be paid by April 15th in order to avoid late payment penalties and interest, which can be quite expensive (and are not deductible!).
Reasons to Extend
Here are some common situations where an extension is warranted:
- The tax return might include information from a pass-through entity (a trust, partnership or S corporation), which may not be available by the April 15th due date for individuals.
- The tax return includes a transaction that requires additional research and/or analysis in order to report it correctly on the tax return.
- The taxpayer experienced an unforeseen life event, such as the death of a spouse, illness of a family member, or relocation due to job or family circumstances, that has made it difficult (or impossible) to file by April 15th.
- There are past due tax returns that need to be filed before the current year return can be filed, as there are items from the delinquent returns (such as loss carryovers) that may affect the current year tax position.
- A self-employed taxpayer may generate more time to fund a SEP-IRA, solo 401(k) or SIMPLE IRA plan by filing an extension, which provides these taxpayers with an extra six months to fund these retirement plans. Please contact us with questions about your individual tax situation.