There may come a time when your tax preparer suggests you file an extension. Do not be afraid! Requesting an extension of time to file your taxes is an effective tax strategy. There are some common misconceptions about extensions. This post will explain how extensions can be implemented as one of the most useful tools at a taxpayer’s disposal.
What does an extension actually do? – An extension of time to file grants a taxpayer an additional six months of time to file their tax return. If an individual files an extension for their 2022 taxes by 04/18/2023, their new due date for tax filing will be 10/16/2023.
What do you need to file an extension? – In order to file an extension, all you need to do is file your extension form. For individuals, that is Form 4868. To complete this form, you will need the taxpayers name, address, and social security number. Businesses will be required to use a different form to request an extension, but the required information will be similar.
Am I more likely to be audited if I extend? – No! There is no inherent additional chance of getting audited if you extend your return. The IRS does not penalize you for extending your tax return filing.
What does it cost to file an extension? – The IRS does not charge a fee to file an extension. A taxpayer can file their own extension through the mail, or they can ask their tax preparer to file for them. It is possible that the tax preparer will charge a fee to file an extension on your behalf, but often the tax preparer will do this filing for no additional fee, or the fee might already be included in the fees charged for your tax preparation.
Does an extension allow additional time to pay my taxes? – No. If you have taxes due, then an extension does NOT grant you additional time to pay these taxes. If you do not pay the taxes by your original due date, penalty and interest will be assessed by the taxing authority. If you are expecting to owe taxes for the year, it is recommended and necessary to make an extension payment. There are several ways to go about determining what to pay at extension time. Often the best strategy is to at least pay what you paid with your prior year tax return. The following is an example to help illustrate the calculation: In 2021 a taxpayer had a total tax liability of $15,000. They had $10,000 of withholding on their W-2, and estimated tax payments of $2,000. This left a payment due by the filing date of $3,000. For 2022 this same taxpayer trying to calculate their extension payment would ensure that between their withholdings and estimated payments, they pay a total of $15,000 by extension time. You can get a more accurate extension payment amount by requesting that your tax professional help you calculate based on your actual activity from the year.
Why should I extend? – The main reason you might want to extend your return is if you don’t have all of the information you need to accurately file. You might have ownership in a partnership or S-corp. If these returns are taking additional time to get filed, you might be waiting for the associated K-1’s. Possibly you have some complex tax issues taking place in this year that require more in-depth calculations and research. Extending in these scenarios allows you more time to get things right, which in the end will keep the IRS off your back.
If you feel like requesting an extension to file could benefit you, or you need help calculating an extension payment, contact your Larson professional today!