Tax time comes around like clockwork every April. For many individuals and businesses that means gathering information for the many required forms. It is something that some people dread as it takes a lot of time and effort to put all the information together. Some people like to put it off until the very last minute. There are some advantages to filing a tax extension. There are also very real disadvantages. It is prudent to weigh your options before coming to this decision.
Before You File a Tax Extension-Need to Know
It is critical to understand that you must file the tax extension by April 15th. If you owe taxes, you shouldn’t file an extension. The IRS automatically gives taxpayers six months to file their taxes without any explanation. You can file the required Form 4868 for individual taxpayers and Form 7004 for businesses electronically or via US mail.
Reasons You Might Consider filing a Tax Extension
One of the most cited reasons for filing a tax extension is the late receipt of a 1099 or K-1 form. This can create some errors in your tax return. Incorrect information is also a valid reason for an extension. Tax extensions give you opportunities to fix the errors and add information. It also allows you to seek professional advice on tax questions without having to file amendments. Tax extensions have also been used to gain more time for filling out complicated tax forms.
Tax extensions can be used to uncover benefits that you may have overlooked. Bigger tax refunds are a major reason to file for an extension. Your financial adviser or tax consultant can help.
Reasons Why You Probably Shouldn’t File a Tax Extension
You need to remember that filing a tax extension doesn’t exempt you from paying taxes. You still need to pay those taxes by April 15th or risk paying a penalty. If you don’t know how much you actually owe, it is best to complete the tax form anyway. The IRS is good at helping calculate what you owe. Paying some of what you owe by the due date also avoids late fees and interest. You can also work with the IRS to pay the rest.
The other problem with tax extensions is that you may miscalculate what you owe. If you file in September for taxes due in April, you will accrue late 5 percent late fees for each month of unpaid taxes. If you owe a lot that could really set you back.
One of the best reasons for not filing a tax extension is the late tax refund. You won’t get your money if you don’t file your taxes.