Federal Income Tax Extensions – Three Things you are Wrong About

There’s nothing like the panic that roars through my office in the days leading up to April 15th. Over the years I’ve found that a large portion of taxpayers don’t know they can file extensions. The ones that do know often have irrational resistance to them. It’s time to clear things up. I’ve addressed the three most common misconceptions below.

The IRS does not penalize you for Filing an Extension

There is no penalty for filing an application for a tax extension. The IRS will not charge you any fee for extending your return. All a taxpayer needs to do is file a Form 4868 ”Application for Automatic Extension of Time to File.” Notice the word “automatic.” Even though the form also uses the word “application,” the extension is granted to all individual taxpayers if it is filed timely (prior to April 15th). Automatic extensions extend your due date by six months, making your return due on October 15th[i].

Filing an Extension is not an “Audit Flag”

Extensions are far more common than you may suspect, particularly for business owners. It can take a lot of time to gather expense documentation or to wait for forms from other businesses that you may have invested in. The IRS wants you to file an accurate return; if extra time is needed to avoid fudging numbers, they are on board. The IRS chooses returns to audit both at random and by focusing on “problem areas.” Extensions are not a problem area. Problem areas are usually related to deductions and credits that take money from the Treasury. Currently, some of the areas that receive the most scrutiny are the Earned Income Credit and the misclassification of workers (independent contractor vs. employee).

Extensions do not Extend the Due Date for Paying the Tax

There is a reason that Form 4868 is called “Application for Automatic Extension of Time to File.” It is just that. The extension moves the due date for filing your return to October 15th, but your tax is still due April 15th. If you need to file an extension, you should estimate what you will owe, if anything, and make a payment prior to April 15th. Even though the IRS interest rate is very low, half of one percent, you can save yourself some money if you ensure you’ve paid by the 15th.

More Extension Facts

The IRS calls its interest a “penalty” so that you can’t deduct it. Generally, penalties are not tax deductible while interest is.
The Failure to File penalty is much greater than the Failure to Pay penalty. If you don’t file by the deadline they will charge you 5% of any tax owed; if you don’t pay by the deadline they will charge you ½ of 1 percent of any tax owed.

[i] Corporate returns are due March 15th and are extended to September 15th with Form 7004. Non-Profits returns are due May 15th and are extended to November 15th with Form 8868.

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