Many people right now are likely trying to decide whether to invest the time now to complete their tax return, especially if it is a complicated one. You may already be very busy and your CPAs/Accountants/Tax Attorneys/Tax Preparers are definitely very busy. So, should you rush to get your return completed or just file an extension and put it off until later?
The benefits of filing an extension (Form 4868 tax return extension is found here) pretty much go without saying: You get more time to get all of your tax preparation materials together. You get the choice to have your tax preparer prepare your return during the down-time between the April filing deadline and the October filing deadline. This will likely mean that they have more time, energy, and focus when working on your return. Additionally, if you are receiving a K-1 from an S-Corporation, Partnership, or Estate/Trust, you may not have received your K-1 yet. You have more time to gird your loins for the bill imposed by your tax bracket.
However, there can be substantial problems associated with filing your extension. Here are some of the most common that we have encountered:
1. Forgetting to File Your Return — it happens!
File an extension and you may need a reminder to remind you of your reminder.
We have clients who have not filed their returns in 10 years, but have filed an extension every year. These people remember their obligation to file their return during the early part of the year, when you can’t turn on a radio or t.v. without being reminded that it is tax season (or tax refund season – as the ads would make you believe). Often, in thinking about this, they “decide” that this will be the year that they are going to get everything cleared up. Unfortunately, after filing that extension and after the advertising hoopla is over, they fall back into complacency and never remember to file their return (for this year or previous years).
2. Interest & Penalties
Filing an extension gives you more time to file your return; it does not give you more time to pay your taxes. Your tax payments are due by April 15th, with or without an extension. If you file your return in October and you have a balance due with your return, you will owe interest and penalties on the amount that you underpaid, even if you send in a check with your return for the full balance shown on the return. If you file your return by April 15th and send in a check for the balance shown on the return, you will not have to pay any extra – and who wants to pay more to the IRS ?!?!?! Regardless of what some tax resolution firms claim, trying to abate tax penalties is not as easy as waving a magic wand and having your debt disappear. The IRS is serious about compliance and will penalize you for not obeying them.
3 You are Just Putting Off the Inevitable
If you are someone who has waited until the end of March to start planning on how to get your return prepared by April 15th, do you really believe that you are going to be proactive later in the year? Maybe this sounds a little mean, but if you are a procrastinator you are just putting off the inevitable (although I think this is the definition of procrastinator). You will likely wait until September to send your tax documents to your tax preparer and be right back up against deadlines for October 15th. On top of the stress of getting your tax return ready when up against a deadline, you have to be prepared to pay extra interest and penalties with your return. This sounds like filing the extension just made things a whole lot worse.
4. You May be Sabotaging Your IRS Resolution
If you are in the middle of trying to resolve a tax problem, filing an extension will only make things worse. While trying to resolve a tax problem, you have to prove that you are in current compliance with your filing and payment obligations. Even though filing extension is not hurting your filing compliance, Revenue Officers and Appeals Officers (and Offer Examiners, if you have an Offer being considered) would require you to prove that you will not owe with your return. In order to prove this, you would essentially have to prepare a return anyway. So, would you rather prepare your return by April 15th and have the IRS representative on your case feel comfortable that you are turning over a new leaf and staying on top of your tax obligations? Or do you want them to feel like you just have a habitual problem? Trust me, you do not want to be seen as a habitual problem to the IRS representative working on your case.
If you have already resolved a tax problem and you are in an ongoing plan with the IRS (like an Installment Agreement, Partial Payment Installment Agreement, Currently Not Collectible Status, or have had an Offer in Compromise accepted) within the past 5 years, incurring a new tax liability can default your resolution. When you file your return in October, if you owe with your return you will need to pay the taxes due with the return, and pay any penalties and interest associated with paying late to avoid defaulting your agreement. If you do not pay these penalties and interest within 30 days of receiving your balance due notice, your agreement may default and you will be in a worse position than you were when you got your resolution the first time.
Conclusion
This all boils down to one central point: If you can prepare and file your return prior to April 15th, you should. You should only file an extension if it is unavoidable. And if you do file an extension, enlist the help of a tax professional to assist you with estimating the amount of taxes, if any, you will owe with your return and pay that amount with your extension. If you need assistance filing your taxes, or resolving a tax debt issue, contact us. We can help.
