92. The Pros and Cons of filing a Tax Extension

The saying that something is better late than never applies perfectly to filing your taxes with the IRS. If for some reason you cannot file your return on time, the IRS should allow you to file an extension of time, typically up to 6 months after the traditional April 18th tax-filing deadline. But, as with most things, there are pros and cons to filing an extension.

A Talk About Filing Extension

A filing extension is an exemption made to both individual taxpayers and businesses

that are unable to file a tax return by the due date. Individuals can complete and file IRS Form 4868 by the regular date of their return, which is usually April 15, for an automatic six-month extension. Most business tax returns can be extended by filing IRS Form 7004. However, the extension of time to file does not provide a corresponding extension for payment of taxes owed. An explanation of the reason for the extension is not required. Some states accept IRS extensions, but others require taxpayers to file a separate state extension form.

An extension moves the filing deadline for personal tax returns from April 15 to Oct. 15.

But is taking one a wise move? You might not have a choice under some circumstances, but there are both pros and cons.

While an extension gives you extra time to file your return, it does not give you extra time to pay your tax. Payments are still due by April 15, 2019, for the tax year 2018. But an extension can help reduce your penalties if you can’t afford to pay in full by the deadline.

6 Pros of Filing Tax Extension

1. It Preserves Your Tax Refunds

Some people end up filing several years late, and there’s a three-year deadline for receiving a refund check from the IRS if it turns out that you’re due one. This three-year statute of limitations begins on the original filing deadline—April 15, 2019 for the tax year 2018. But the refund statute of limitations is also extended by six months when you file an extension. his can preserve the ability of taxpayers to receive their federal tax refunds even if they’re behind with submitting their tax returns.

2. It Gives the Self-Employed More Time to Fund Retirement Plans

Self-employed persons might want to fund SEP-IRAs ( Simplified Employed Pension ), solo 401(k)s, or SIMPLE-IRA (The term “SIMPLE IRA” serves as an acronym for Savings Incentive Match Plan for Employees Individual Retirement Account (IRA) ) plans for themselves. Filing an extension provides these taxpayers with an additional six months to do so.

Solo 401(k) and SIMPLE plans must be set up during the tax year, but actually funding the plan can occur as late as the extended deadline for the previous tax year. Entrepreneurs can open and fund a SEP-IRA for the previous year by the extended deadline as long as they’ve filed an extension.

3. It is simple and fast

All that you should do, call (800) 913-0809 or text (224) 676-3577 us.

4. You’ll avoid a late-filing penalty

Ordinarily, if you don’t file your return by April 15, you’ll pay a penalty of 5 percent of the tax you owe for every month that you’re late, with a maximum total penalty of 25 percent. Moreover, if your return is more than 60 days late, then the minimum penalty is either $135 or the balance of taxes you owe, whatever is smaller. If you file for an extension, however, you don’t get charged a late filing penalty as long as you file by October.

5. An extension isn’t an automatic audit red-flag

Many taxpayers are afraid that by getting an extension, they’re inviting scrutiny by the IRS. But most of the time, an extension reduces your audit risk because you’re less likely to make the dumb mistakes that last-minute filers typically make.

6. You’ll get more time to reverse a *Roth conversion and take advantage of other

obscure rules

One quirk of the tax laws is that if you converted a regular retirement account to a Roth IRA during 2013, you can undo that conversion at any time before your 2013 return is due. By filing for an extension, you get another six months before you have to decide. Undoing a Roth conversion can save you taxes if the value of your investments have fallen since the conversion, and with the market at all-time highs, many fear a potential downturn could be coming soon.

In addition, there are other less commonly used rules, such as funding a self-employed retirement plan, that are tied to an extended filing deadline. Getting an extension gives you more time to get those tasks done as well.

5 Cons of Filing Tax Extension

1. Extra Time to File Doesn’t Mean Extra Time to Pay

An extension will give you extra time to file our return, but any tax you owe is still due by the original deadline. An extension can help reduce penalties, but any outstanding balance will still be charged a late payment penalty of 0.5 percent per month and interest.

2. You have to wait longer for your refund

If you’re due a refund from the IRS, you can’t claim it until you file your tax return. So even though extending gives you more time to file, it also lengthens the potential wait for your eventual refund check.

3. It won’t be any easier six months from now

If you’re prone to procrastination, the temptation after you file for an extension is simply to squander the next five months until the October deadline starts approaching. So, if you need the push of having a deadline in order to get your taxes done, you’ll probably be better off just biting the bullet and getting your returns filed now.

4. No Extra Time to Make the **Mark-To-Market Election for Professional Traders

According to Joe Kristan, CPA, “If you qualify as a ‘trader,’ April [18] is your deadline for choosing whether to make the ‘mark-to-market election’ on your trading positions.”

5. You Might Confuse the IRS

The IRS might think that you need to file a tax return if you file an extension. If you end up not filing, perhaps because it turns out that you don’t meet the filing requirements so it’s just not necessary, the IRS might get confused and ask you to file a return anyway because you filed an extension to ask for additional time.

Moreover, another reason to avoid using income tax extensions is the stress they can add to your life. Filing later means your tax paperwork is still hanging over your head for the following weeks or months.

In conclusion, if you can’t get your taxes done early enough, then filing for an extension is likely your best move. But even if you do get an extension, don’t wait until October to file. Get them done as soon as you can, and you’ll be able to stop worrying about the IRS watching over your shoulder.

(*A Roth IRA (individual retirement account) plan under United States law is generally not taxed, provided certain conditions are met)

(**Mark to market (MTM) is a measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution’s or company’s current financial situation.)