The Pros and Cons of Filing a Tax Extension (2019-2020)
If you need more time to figure out and file your taxes for the 2019 tax year, you may consider filing for a tax extension. With IRS Form 4868, you can request additional time, and an extension changes the filing deadline in 2020 from July 15 to Oct. 15.
In some cases, people may be eligible for some type of extension without needing to file the additional form, such as members of the U.S. military who are currently deployed overseas.
In general, the IRS approves requests for extension. It should be noted that an extension request does not delay the payment deadline for taxes, only the filing deadline, and you do not need to include an explanation or documentation to excuse the late filing.
Your payments for taxes due for the 2019 tax year are still due on July 15, 2020; if you filed for an extension, there may be some reduction in penalties if you are unable to pay in full before the deadline. However, there are both advantages and disadvantages that you may wish to consider.
Why file for an IRS extension?
There are a number of good reasons to file for an IRS extension to get yourself more time to complete your preparations, especially if you are dealing with a complex return. Here are some of the main advantages of filing for an extension:
1. Get more time for your taxes
The first pro is fairly obvious: You may need six more months to file your taxes.
If you are waiting for some types of documents, need more time to get your receipts and deductions in order or need to deal with gift taxes, an extension can provide extra time to deal with all of the paperwork on your end.
2. Keep your refund intact
In order to receive the tax refunds you are due, it is important to file your taxes relatively on time. There is a three-year statute of limitations to receive a refund that you are due, so you can still get a refund if you file your taxes years later.
The deadline begins to toll from the original filing deadline of April 15. However, if you file an extension, that deadline to receive a refund is also extended by six months, so it can be important to protect your refund if you are further behind on your filings.
3. Reduce penalties for late filings
If you file your taxes late, you may face two separate types of IRS penalties. The agency imposes a .5% late payment penalty per month and a late filing penalty of a full 5% per month.
While the .5% penalty is still due for any late payments, you will not need to pay the larger late filing penalty if you submit your taxes by Oct. 15.
4. Make decisions about your tax return
You may need more time for professional advice about how to file your taxes, including the deductions to claim, filing status to use and other concerns. If you have a more complex return, you may have a number of considerations to keep in mind. An extension gives you more time to make the right choice.
5. Get your retirement in order
If you are self-employed, you may want to plan for the future and reduce your tax burden by keeping your funds in a solo 401(k), SEP-IRA or SIMPLE-IRA. You do not have to pay income taxes on the money you put in these types of protected retirement funds, up to the annual limit.
While 401(k) plans and SIMPLE IRAs must have been created in 2019, an SEP-IRA can be created up to the extended tax filing deadline. In all cases, you can complete the actual funding before you file your taxes in 2020, up to Oct. 16.
6. Make sure you get it right
If you’re in too much of a rush, it can be easy to miss key documents, omit income or make errors with deductions. You may need to file an amended return in some cases or trigger an audit. If you are unsure about the accuracy of your filing, an extension may give you time to get it right before filing.
So what is the benefit to not filing for a tax extension?
On the other hand, there are also some potential cons to filing for a tax extension – or, at least, problems that an extension will not be able to address. Here are some of those considerations.
1. No payment extension
As noted, filing for an extension gives you more time to file your paperwork but not more time to pay overdue taxes. You can reduce late filing penalties, but you will still face the .5 percent late payment penalty and interest if you pay your tax bill late as well.
2. Potential for confusion
Some people do not need to file a tax return. However, if you do not decide this issue until after the original filing deadline, the IRS may follow up on your extension request and ask you to submit a tax return. Even though you were not required to file, the IRS may believe that you need to due to the outstanding extension request.
3. No extra IRA time for employees
If you are not self-employed and have a regular IRA or a Roth IRA, you can still make your contributions up to April 15. However, you cannot extend the contribution deadline until Oct. 15 for tax-deferred income; even if you file an extension, you have to make your contributions by the original deadline.
4. No additional time for certain filing choices
Even if you file for an extension to get more time to sort out complicated tax matters, you may not get additional time to make certain choices. Married couples need to decide whether to file jointly or separately before April 15, while professional traders still need to make the mark-to-market election before that original filing deadline as well.
How to File for a Tax Extension
Keeping these things in mind, an IRS extension can still be very useful for people who need more time to sort out the details of their tax filing, especially if you are dealing with different types of income streams or complex deductions.
You can file for the extension in several ways:
- Mailing in IRS Form 4868 that you printed and downloaded from the IRS website
- Using IRS Free File to e-file the extension paperwork
- Using your tax software to file the paperwork for an extension; most tax software programs support extensions, and there are some options to process extensions exclusively.
- Working with your in-person or online accountant to file your extension request on your behalf.
You can also request an extension while using the IRS’ Direct Pay system online to make a payment if you owe taxes directly.
Who gets an automatic extension?
Some people may not need to request an extension from the IRS at all. You should check with your accountant to make sure this applies to you, but members of the military deployed abroad often receive an automatic six-month extension, as do people affected by major natural disasters.
If you are a U.S. citizen living and working overseas when taxes are due, you can receive an automatic two-month extension, moving your filing deadline to June 15.
If you are struggling with filing your taxes before July 15 or sorting out a complex situation, professional tax guidance may help you. At Picnic Tax, we connect you with skilled online accountants who can handle your tax returns without the need for appointments and with a flat fee that you understand in advance. We can also help you file for an extension if you need more time. Contact us today to find out how we can help you.