Why file a tax extension?

Tax Day is generally on April 15, the date has been moving around for the last few years due to Emancipation Day, a D.C. holiday. Individuals are required to file their individual tax returns with the IRS and any applicable states on or before Tax Day or file Form 4868 which is more commonly known as a personal extension. All you need to do is have your tax professional fill out the form and file it on or before Tax Day. No supporting documentation is needed to obtain the extension. It’s referred to as an automatic extension, but the form still has to be submitted to the IRS. In Colorado the federal extension also extends your state return.  Each state sets their own criteria for extensions so if you need to extend in other states give us a call and we can discuss your situation. The Form 4868 is a one-page form telling the IRS that you’ll be filing your return on or before October 15 rather than April 15.

You’re required to pay all taxes owed by Tax Day. Filing an extension won’t extend the due date of your payment.

The biggest misconception about filing individual extensions is regarding payment.

Myth: If I file an extension (and owe) I won’t have to pay until October when I file my return.

Fact: Any amounts owed are still due on Tax Day regardless of whether or not you have filed an extension. If you don’t file anything the penalty is 5% of the tax owed plus interest. If you file an extension that penalty drops to 0.5%. A substantially lower amount. Also, while rarely enforced, the failure to file a return when a return filing obligation exists is a felony.

If you are unable to pay the amount of tax that is owed in your individual return not filing anything just makes it worse. Filing an extension gives you 6 months to figure out a solution or get professional help and drastically reduces the penalties associated with non-filing.

So, then why would you file an extension?

Typically, extensions are filed when you need additional time to complete your return or pay tax, as discussed above.

Most individuals file an extension when they are expecting documents from business, or trust returns that will not arrive until very close to or after Tax Day. This is typically because there is so much documentation that is needed to file those returns and they don’t receive those documents on time to have their return drafted and filed. Some people file extensions if they’ll be traveling during tax season, or if they have an unexpected (or expected) life event that makes it difficult to complete their return.  A reason is not required to file an extension. So, whatever your reason, just make sure you make your payment in April.

We’re just discussing personal returns today. Business return dates and penalties for failure to file or pay are different.