Hooray! It's tax season! Spring is (hopefully) on the way and that means that the long winter is finally over. It also means that April—specifically April 15, aka Tax Day—is just around the corner. This day can be even more stressful when certain factors make filing taxes difficult, such as not having all the information you need to file your taxes. When circumstances conspire to keep you from filing your taxes, stay calm. Take a deep breath. You have options. One of those options: you can file for an extension. Here's a quick rundown on the criteria to consider...
Why You Should File For An Extension
The great thing about filing an extension is the breathing room it grants you for gathering the documents you need to make a proper filing. Things that can slow you down include income from the sale of property, exercising of stock options, cancellation of debts or other delays (think a Schedule K-1 that hasn't shown up yet). In addition, if you commonly receive corrected 1099s, particularly if you are dealing with foreign taxes or qualified dividends, an extension is helpful. Last but not least, if you’ve decided to create a retirement account such as the SEP IRA (which offers a tax write-off, of course), an extension will grant you a bit more time to do so.
Why You Shouldn’t File For An Extension
A major reason you might be considering filing for an extension is because you can’t pay the money you owe. However, if you owe money to the IRS, you still need to pay 90 percent of what you estimate you owe by April 15th. Filing for an extension does NOT mean you do not have to pay by the deadline. An extension only grants you extra time to file the return (aka, the paperwork). If you cannot pay all of what you owe, filing an extension will not help reduce penalties for late payments. Oftentimes, the IRS is pretty flexible when it comes to setting up payment arrangements, so consider doing that instead of an extension. If inability to pay isn’t the problem, you might want to take the time to work with your tax preparer to learn how to plan your taxes better and meet that deadline.
Of course it goes without saying that this post is not tax, legal, or financial advice. Always consult a tax professional when considering things like filing for an extension.
Are You Eligible?
Not everyone can request an extension. If you have been approved for an “offer in compromise” to pay off taxes, you will still need to file by April 15th during the five year probation period that follows. Additionally, while filing an extension allows you to put off filing so you can take care of things like setting up a retirement account, you will still need to fund that IRA or SEP IRA by April 15th or you won’t receive the tax credit for the previous year’s taxes.
Read up on the IRS' "Eight Facts on Late Filing and Late Payment Penalties."
How To File For An Extension
Thankfully, this part is easy. Individuals can do so for free online using form 4868. Business such as corporations and partnerships can use form 7004. You can also download the forms and send them snail mail by April 15th if you prefer. If you live outside of the United States (but are filing US taxes), you may be able to still get an extension if you use the 2350 form (for additional information, this handy packet of info from the IRS for US citizens living abroad will help).
Remember: filing for an extension only buys you time to file your returns. It does not mean you do not have to pay what you owe by your stipulated deadline. Do not think of an extension as a free pass on paying what you or your business owes. It's not. If your ability to make the payment is the issue, you're best bet is to get in touch with the IRS.