Federal Tax Returns: Should You File an Extension?

Obtaining a six-month extension to file is relatively easy, and there are legitimate reasons for doing so; however, there are also a few downsides. If you need more time to file your federal income tax return this year, here’s what you need to know.

What Is an Extension of Time to File?

An extension of time to file is a formal way to request additional time from the IRS to file your tax return, which, in 2023, is due on April 18. Anyone can request an extension; you don’t have to explain why you’re asking for more time. Individuals filing an extension are automatically granted an additional six months to file their tax returns. In 2023, the extended due date is October 16.

Businesses can also request an extension. In 2023, the extended deadline for S corporations and partnerships is September 15, and for C corporations it’s October 16. Special rules may apply if you serve in a combat zone, a qualified hazardous duty area, or live outside the United States. Please contact the office if you need more information.

Taxpayers should be aware that an extension of time to file your return does not grant you any extension of time to pay your taxes. In 2023, April 18 is the deadline for most to pay taxes owed and avoid penalty and interest charges.

Let’s take a look at why taxpayers might consider filing an extension this year:

1. If you file an extension, you can avoid a late-filing penalty. If you file your return more than 60 days after the due date (or extended due date), the minimum penalty is the smaller of $435 or 100 percent of the unpaid tax. The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25 percent, of the amount of tax that remains unpaid from the unextended due date of the return until the tax is paid in full.
2. You won’t have to pay a late filing or late-payment penalty if you show reasonable cause for not filing or paying on time.
3. You can file a more accurate and complete tax return. Rather than rushing to prepare your return (and possibly making mistakes), you’ll have an extra six months to gather up required tax records, especially if you’re still waiting for tax documents that haven’t arrived or need more time to organize your tax documents in support of deductions.
4. If your tax return is complicated, your tax preparer or accountant will have more time to work on your return to ensure you can take advantage of every tax credit and deduction you’re entitled to under the tax code.
5. If you’re self-employed, you’ll have extra time to fund a retirement plan. Individual 401(k) and SIMPLE plans must have been set up during the tax year for which you’re filing, but it’s possible to fund the plan as late as the extended due date for that year’s tax return. SEP IRA plans may be opened and funded for the tax year by the extended deadline as long as an extension has been filed.
6. Filing an extension preserves your ability to receive a tax refund when you file past the extension due date. Filers have three years from the original due date (e.g., April 18, 2023) to claim a tax refund. However, if you file an extension, you’ll have an additional six months to claim your refund. In other words, the statute of limitations for refunds is also extended.

Now, let’s take a look at the downsides of filing an extension:

1. If you’re expecting a refund, you’ll have to wait longer than you would if you filed on time.
2. Extra time to file is not extra time to pay. If you don’t pay at least 98% of the tax due now, you’ll be liable for late-payment penalties and interest. The failure to pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. If you cannot pay, the IRS has several options for payment arrangements. Please contact the office for details.
3. When you request an extension, you’ll need to estimate your tax due for the year based on information available at the time you file the extension. You must estimate your tax liability on this form and should also pay any amount due. If you disregard this, your extension could be denied, and if you filed the extension at the last minute assuming it would be approved (but wasn’t), you may owe late filing penalties as well.
4. Dealing with your tax return won’t be easier six months from now. You’ll still need to gather your receipts, bank records, retirement statements, and other tax documents – and file a return.

Help Is Just a Phone Call Away

If you need more time to prepare your federal tax return, then filing an extension of time to file might be the best decision. If you have any questions or are wondering if you need an extension, don’t hesitate to contact our office.

Napoli Tax Services LLC is a tax preparation, tax problem resolution, IRS representation and CPA tax services firm for individuals and small businesses.