Do you really require some extra time before you file for your yearly taxes? If you are contemplating filing for an extension using IRS Form 4868 due to some unforeseen reasons, you must know the pros and cons of such a decision. The IRS, with its historic wisdom, has many well debated and tried quirks that we do not know about.
Filing for an extension does not save you from not paying what you owe. It essentially just buys you more time to file your return. By doing so, you can file on October 15 rather than April 15. Application for an extension because of a silly bout of procrastination would not be a wise move at all. The provision is for the ones who have legitimate grievances that hinder their smooth and punctual filing.
Applying for an extension is a fairly easy process. The IRS does not ask for justification while you file your Form 4868. Special exemptions are available to military personnel serving abroad. Read on to find out more about how a tax extension could serve as an advantage or disadvantage in your condition.
Pros of applying for an extension
The reasons might be silly or due to an unexpected crisis. If you have been spending on gifts, you could buy more time for gift tax filing. A few of the advantages are discussed here.
Missing your documents
Buying more time sounds like a great relief for people who have missed a document or more due to the hasty filing circus or shabby bookkeeping practices. It could also buy you more time while patiently waiting for documents to arrive by mail.
Avoiding Late Penalties
The IRS charges two kinds of penalties. One of them is a 5% late fee per month if you have not requested for any extension. Then there is 0.5% per month up to a maximum of 25%. You will deal with only one of these if you file for an extension. At the time you file your Form 4868, you will be granted an extension until October 15. You will be fined the mentioned amount only on failing to pay your due amount.
Preserving Your Tax Refund
Another advantage for people who have missed on years of filing is that the refund statute of limitations is also extended by six months when you apply for extension. It goes without saying that this gives a much-needed space for people to wait for their federal tax refunds even if they are behind with submitting their tax returns. Taxpayers face this dilemma when they miss a year’s filing and invoke the three year statute of limitations since the date of their most recent filing.
Benefitting Your Self-Employed Retirement Plan
Independent contractors and self-employed people can get an extension while continuing to fund their SEP-IRA for the previous year up until the deadline. Such provisions are to help the taxpayer to patiently fund their SIMPLE IRS plan or Solo 401(k)s. Retirement plan provisions like Solo 401(k) can be funded up until the deadline for filing your previous year’s taxes.
Time to Take Decisions
One of the main justifications for applying for an extension revolves around buying time for consultation. The right advice from a tax expert can take you along the right path. If you think you are on shaky grounds when deciding about which deduction would be the best option for your income source and business profile, then asking for a six month extension would help plan your tax filing in a much more professional manner.
Reducing the Risk of Audits and Mistakes
Auditing by the IRS becomes less frequent as the year rolls by. This does not necessarily mean that the authorities begin to turn a blind eye as months pass by but extending your filing gives you and your tax consultant much needed thinking space to figure out where your filing could go wrong. Tax filing mistakes are a very common evil in tax seasons which unfortunately lead to rare audits and unforeseen drama.
Avoiding the Tax Preparation Fee
One of the real hacks of saving money, ironically, would be to wait out on the tax consultant to lower their tax season prices. If you are the fret-over-the-overpricing kind, this should be a great way to save your money.
Cons of applying for an extension
If you are wondering what would be the possible disadvantages of an attractive provision like the extension, then think again. Buying time does not reduce the amount you owe. Period.
IRA funding time
For people who do not fall under the category of self-employed taxpayers, both traditional and Roth IRA (Individual Retirement Arrangements) are due on the regular April 15 deadline.
Joint to Separate Filing
The April deadline does not change even if you are a married taxpayer who has had the practice of filing joint returns and have to file your returns separately from the current year onwards.
Giving an Alternate Impression
It is also likely that when you file for an extension, the IRS might ask you to file your returns anyway. This could be due to their inference that you owe taxes. But filing for taxes in April, even if you do not come under the required income, might render you as eligible for earned income tax credit. This could lead to the IRS refunding the credit but it must be because you filed your returns despite your grievances.
Recharacterizing Your IRA
Under the Tax Cuts and Jobs Act (TCJA) that came into effect in January 2018, you cannot recharacterize your traditional IRA to a Roth IRA. This was a provision prior to the passing of the act wherein converting your IRA from a traditional one to a Roth IRA was not an issue if you had been granted an extension.
Like the above pointers, an exhaustive discussion with your tax consultant can help you understand the nuances of filing on time or extending till October. Various tax preparation software packages have been developed to help a taxpayer apply for an extension. The only thing stopping you from extending is prioritizing the pros over the cons before applying for one.
For more information on tax extension, contact the professionals at UBOS and let us produce a plan that beats the IRS like a drum!