Tax Extensions - Why you need one (or more than one)
April 15 is known as “Tax Day”. In fact, the real Tax Day wrapping up tax season is October 15. The IRS allows a generous “automated” 6 months extension to every taxpayer - but it is not automatic. The extension must be requested by filing Form 4868 (TFX can file this for you).
Some taxpayers are reluctant to file an extension. Commonly cited reasons are:
- An extension may raise a red flag before the IRS and increase the risk of audit
- I am a natural procrastinator. If I file an extension I may be late in October too.
- I have all my tax documents ready. It is just the matter of getting the forms filled. Why file an extension if I won’t use it?
In truth, none of those reasons matter. You can file your tax return at any time up until the extension date. Giving up this free gift from the IRS is akin to rafting without a life vest; you don’t expect the raft to turn over but if this happens that little vest will be your life saver. And, importantly, you don’t get extra points for finishing your trip without wearing one.
S-Corps, Partnerships - some extensions need to be filed earlier than others
Often, an extension is an obvious necessity. If you expect to receive income from a partnership, you must file extension because you have very little chance to receive the form reporting your income from the partnership (so called Schedule K-1) ready before May.
On the contrary, if you are a general partner in the partnership responsible for tax filing, you should rush to file extension for the partnership. Partnership extensions have a shorter timeline, and must be filed by March 15th. Failing to file a partnership tax return or partnership extension by March 15, one may expect to pay $195 penalty per each partner, per each full or partial month of delay. One day is considered a partial month. Same penalties will be applied for delayed tax return of S-corporation (same timeline of March 15).
And don’t forget about state penalties; many states (i.e. New York or Florida) require a separate extension for business state return - and penalties for late filing levied by state tax authorities are higher than those levied by the IRS.
Free options are the best options - don’t give up flexibility
Not everyone is a bigwig - let’s say you don’t have a corporation or partnership, but simply freelance and report your income on Schedule C. Upon having your tax return prepared you discovered that you owe more tax than you had anticipated. Wisely, your tax preparer suggests to make a contribution to SEP plan, which will reduce your taxable income significantly. You can put aside up to 25% of your net business income and the timeline to make SEP contribution is October 15, not April 15 like for the regular IRA.
Alas! You did not file extension, and therefore you missed the opportunity to make SEP contribution after April 15. Had you filed extension (just in case) - your hard earned dollars (or Euros, etc) would go towards funding your retirement instead of paying higher taxes to Uncle Sam (or Aunt New York).
There are dozens of other examples where a timely filed extension protects you from filing in a rush at the last moment, filing with an incomplete set of documents, filing an amended return and spending more time and more money - only because you left your life vest behind before setting sail.