What it means to file a federal tax return extension
Posted On: 3-20-2017 | Posted By: Kara Holterman, CPA
As the April 18 individual tax filing deadline approaches, you might be wondering: Should I file an extension? There are advantages to applying for an extension of time to file a federal tax return with the IRS, but it might not be the right thing to do in every case. Read on to learn about the factors you should take into consideration when determining whether an extension is right for you.
When you file for an extension, you are asking the IRS for an additional six months to file your tax return. For the 2016 tax year (returns that are filed in 2017), an extension will extend the filing deadline for personal tax returns from April 18 to October 16. Businesses can also request an extension, which pushes the deadline to September 15.
Key benefits of filing an extension
- Six extra months to finish up your tax return. Having extra time to finish your return is often necessary, especially if you are still waiting for tax documents to arrive in the mail or you need additional time to organize your tax deductions. Extensions also provide extra time to file your gift tax return.
- Reduce late penalties. There are two basic penalties the IRS typically imposes: a late filing penalty of 5 percent per month on any tax due, plus a late payment penalty of half a percent per month. If you file an extension and then file by the extended deadline of October 17, you’ll avoid the 5 percent per month late filing penalty. If you file after October 17, the late filing penalty will begin from October 17, which creates a deferral of this penalty.
- Preserve your tax refunds if you file after the extended deadline. Some people end up filing several years late, and there’s a three-year deadline for receiving a refund check from the IRS. This three-year statute of limitations begins on the original filing deadline (April 18, 2016, for the year 2015). With an extension, the refund statute of limitations is extended by six months, which can preserve the ability of taxpayers to receive their federal tax refund even if they get behind in submitting their tax return.
- Provide extra time for self-employed persons to fund a retirement plan. Self-employed persons may want to fund a SEP-IRA, solo 401(k) or SIMPLE-IRA plan for themselves. Filing an extension provides these taxpayers with an extra six months to fund their retirement plan. Note: solo 401(k) and SIMPLE plans need to be set up during the tax year, but funding the plan can occur as late as the extended deadline for the previous tax year. With a SEP-IRA, however, entrepreneurs can open and fund a SEP-IRA for the previous year by the extended deadline if they filed an extension.
- Additional time to recharacterize an IRA contribution. If your IRA is funded by the April deadline, you can change the nature of the IRA by the October extended deadline. Essentially, you can turn your traditional IRA contribution into a Roth IRA, or a Roth IRA contribution into a traditional IRA contribution. This is helpful if you’re not sure what type of IRA you are eligible for. You can even use this provision to recharacterize a Roth conversion back to a traditional IRA.
- Provide additional time to make various elections on your tax return. There are a wide variety of decisions that can be made on the tax return, such as deciding whether to depreciate equipment or take a Section 179 deduction, and whether to carry back or forward any business losses. Those decisions must be made when the tax return is filed. Filing an extension gives you extra time to make those decisions.
Is There a Downside to Filing an Extension?
An extension might not be right for every situation, and not everyone is eligible for file an extension. Consider these issues before requesting additional time for file.
- Extra time to file doesn’t mean extra time to pay. An extension will give you extra time to file your return, but any tax is still due by the original deadline; because you estimate the amount due, you can unknowingly pay too little, and still owe a penalty on the remaining amount due. Estimates to avoid underpayment penalties for the succeeding year are based upon the prior year, making it difficult to prepare accurate estimate amounts for the first three quarters of the succeeding year. An extension can help reduce penalties, but any outstanding balance will still be charged a late payment penalty (0.5 percent per month) and interest (right now at 3 percent annually). An extension can help reduce your penalties if you cannot afford to pay in full by the deadline.
- Some people aren’t eligible for extensions. Taxpayers who were approved for an offer in compromise[KD1] must file by the April deadline during their five-year probationary period. An offer in compromise is a request, filed by a tax payer who is unable to pay a prior balance due, and who can prove financial insolvency or extenuating circumstances, to reduce the amount of interest, penalty, and tax due on a prior period. These requests must be submitted with adequate documentation to substantiate the request, and then must be accepted by the Internal Revenue Service to become valid. If you don’t file by the April deadline, the IRS can revoke your offer in compromise and reinstate the original amount you owed.
- An extension won’t give you extra time to fund an IRA. Contributions to a Traditional IRA and/or Roth IRA are due by the original April deadline.
- An extension won’t give married couples extra time to switch from joint to separate returns. Married taxpayers who filed jointly by the April deadline can, if they wish, switch to the married-filing-separately status by April 18 by amending their tax return.
- An extension will also extend the statute of limitations by six months. This means, for the tax year 2016, instead of the statute of limitations ending on April 15, 2020, it would end on October 15, 2020. This extends the amount of time the IRS can audit and assess taxes on items that may have been mistakenly reported.
If you would like to discuss whether filing an extension is right for you and how it could affect you, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.