Accounting On Us
My CPA says to file for an extension
Jeremy Smith, CPA
Filing for an extension of time to file your tax return can be an important strategy for you to implement as we move closer to the April 17 tax deadline for individuals. An extension gives you extra time to submit a complete and accurate return. Here’s everything you ever wanted to know about filing for an extension including the benefits, reasons, myths and more.
Benefits of extending
Filing an extension allows you:
- Additional time to file your returns without penalty when you’re waiting for missing information or tax documents such as Schedule K1s, corrected 1099s, etc.
- Time to observe what is happening with tax law changes to make decisions regarding how to file your taxes. Often there are decisions/elections you can make after the end of the year that could impact how your taxes are filed. In addition, you may qualify for additional retirement planning opportunities or additional time to fund certain types of retirement plans, for example, a SEP IRA.
It is also often less expensive (and easier) to file an extension rather than rushing now and possibly needing to amend your tax return later.
Why would I need to extend?
There are several reasons it might be a good idea to extend your tax return.
Extra time to make retirement related contributions. In many cases, an employer’s contribution to a qualified retirement plan for employees has already been determined by December 31, but the company still needs time to accumulate the funds for the contribution. As long as the extension has been properly filed the employee/taxpayer can deduct the accrued contribution in the prior tax year, and not make the actual contribution until the extended due date of the tax return (which is in the following year).
Identity theft. Unfortunately, identity theft and tax-related identity theft is becoming more common. If you become a victim of identity theft, you may need to file for an extension to get those issues resolved or you may need time for the IRS to issue an Identity Protection Personal ID Number (IP PIN). (An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent the misuse of their Social Security number on fraudulent federal income tax returns.)
I need more time to pay. One of the reasons you may need to file for an extension is that you need more time to pay your tax bill. Unfortunately, the filing of an extension does not grant you additional time to make your payment of taxes due. But, if you aren’t able to pay all of your taxes by the original filing deadline, the filing of an extension will prevent you from being assessed with a late filing penalty. You will be assessed late payment penalties up until the extended due date, when all taxes can hopefully be paid. If you still cannot pay your taxes, there are different ways of working with the IRS to get this accomplished.
Now, on the flip side, there may be reasons NOT to extend. For example, you may want to, in fact, file early to claim your kids before your ex-spouse does. Some divorced couples may have an agreement that one spouse claims the kids in one year while the other claims them in another year. However, in the case that agreement is not honored and your spouse files first and claims the kids, you may have to fight them.
Should I do anything differently if I file for an extension?
No, you still should give your CPA whatever information you have as early as possible or as soon as it becomes available. You still need to submit all available tax information to your CPA promptly so he/she can determine if you will have a balance due or if you can expect a refund.
Don’t forget that if you are required to make quarterly estimated tax payments, your first quarter estimated tax payment is also due April 17. Generally, we may recommend that you pay the balance due for last year and your first quarter estimated tax payment for this year with your extension.
If you are anticipating a large refund, you will want to get your extended return done as soon as possible once all tax information is available. Also, you will want to discuss various tax planning opportunities so that in future years, you don’t give the IRS an interest-free loan all year.
I filed for an extension but something came up with my return
If you extended your tax return and file before the extended due date, then suddenly need to make a change because something is wrong, you could file a superseding return. This is actually still treated as if it’s your original return. Some examples could include:
- You forgot to make a special tax election
- You forgot to revoke an election
- You need to complete certain international disclosures such as foreign bank accounts
The benefits of filing a superseding return go far beyond the ability to correct errors without risk of an accuracy-related tax penalty. Because a superseding return is treated as the taxpayer’s “first return,” it can be utilized to make or change binding elections that would otherwise not be open to revision (because they can’t be made on an amended tax return). This is perhaps even more valuable than avoiding penalties, especially for corporate and business filers, where a single missed election can have devastating consequences that affect future tax years. In fact, court cases and IRS rulings have held that a superseding return even allows for the revocation of an election that is otherwise irrevocable.
Doesn’t extending increase my chances of being audited?
Extending will NOT increase your likelihood of being audited by the IRS. It is better to file an extension rather than to file a return that is incomplete or that you have not had time to review carefully before signing.
Okay, I’m ready to file for an extension
The extension period is six months, so you will have until October 15, 2018 to file your tax return. (In most cases, states will also provide for the six month extension time period.) You would either need to file Form 4868 or file electronically, which probably means you are filing with your CPA.
Remember, when you file an extension, you still need to estimate and pay the tax you will owe by April 17 or face potential penalties. Be sure to also file for your extension timely, otherwise you could end up paying a late filing penalty as well as a late payment penalty.
As always, talk with your Henry+Horne tax professional before deciding if an extension is the right route for you to take.