What is a Tax extension?
Before we dive into when you should or shouldn’t file for a tax extension, we must first understand what a tax extension is. A Tax extension requests more time to file your federal income tax return with the IRS. It is a great way to avoid late filing penalties and interests for individuals who can’t meet the deadline; it gives you time to put things in place but doesn’t mean you get extra time to pay your taxes.
Should I File An Extension For My Taxes?
Filing a tax extension is only sometimes a good idea, especially if you owe, as the extension only gives you more time to file. However, your debt would still accrue penalties and interests, putting you in a worse situation than you were initially.
You should always file your taxes on or before tax day, but if you still need to put everything in place, you can apply for an extension. But, it’s important to note that while filing for an extension, make sure you estimate the taxes you would owe and submit an estimated payment as soon as possible to avoid late payment fees from racking up.
There are several scenarios where filing for an extension is a bad idea, and the same goes for not filing. We’ll go over this in detail so you’re better informed.
When you should file for an extension
The IRS understands that there might be several reasons why you might need to file for a tax extension; here are some of the main reasons you should consider filing for a tax extension:
- More time to find and detail your expenses:
If you run a small to medium-scale business, have a side hustle, or received a 1099 last year for any extra income, take your time and look for any write-offs you can. In this scenario, you shouldn’t feel pressured to file on the initial deadline, as you can enjoy write-offs that W-2 employees can’t and reduce the tax on your business’s income.
- You have some missing or inaccurate information:
You can only file an accurate tax return if you have all the information at your disposal, as it’s normal for some information returns, like Schedule K-1 or Form 1099, to arrive too late to be filed by tax day. The IRS imposes some deadlines for filing information returns. Still, the deadlines are extendable and can range from 30 days to 6 months, depending on the return.
- Scheduling or timing issues:
Sometimes, due to no fault of yours but your busy schedule, you wake up one morning and find out that the tax day is already around the corner, and you know that you might not be able to file your tax in time accurately; you can request for an extension to give you time to handle your returns carefully.
- Reduce your chances of being audited:
Filing for an extension is a great way to audit-proof your return, giving you more time to file your tax returns later in the year. The IRS works on a first-come, first-served basis when assigning audits. With only 33 IRS districts for the 50 states, these districts establish an annual quota for the number of audits to be conducted.
These quotas always fill up before the end of the extension deadline. Although audits are still assigned after the extension deadline, it’s up to the IRS computer systems to flag tax issues.
Considering the timeline, it’s safe to assume that filing your taxes on or just before the extension reduces your chances of an audit while filing after the extension deadline significantly increases this chance. So be smart and file within the initial and the extension deadlines.
- Use this time to find better help; don’t file your taxes yourself.
Most individuals file their taxes themselves, maybe because their current tax preparer isn’t skilled enough or too expensive. I strongly advise against this, especially if you don’t have any tax preparation or accounting experience, as you might make things worse for yourself.
In cases like this, you could file for an extension and use this time to find a good tax professional willing to take you on as a client, as most tax professionals will only be willing to take on new clients after tax day due to the amount of work during tax season. Still, they can be more open to taking in new clients after tax day in preparation for the extension deadline.
When you should not file for a tax extension
Most people file for tax extensions because they can’t pay their taxes by tax day. As I explained earlier, this is the worst thing you could do to yourself as it dramatically increases your debt. If you find yourself in this condition, you could read Can’t Pay Your Taxes? Here’s What to Do, where I clearly explain steps to take when you discover that you can’t pay your tax by tax day.
There are some other reasons why a tax extension isn’t a good idea, such as:
- You don’t run a small to medium-scale business.
- You’re due a tax refund.
- Your tax refund is generally straightforward.
If all of the above is true in your case and you still request a tax extension, you’re giving the IRS an interest-free loan of your own money.