With the individual extension filing deadline just over a month away, it is time to look at common misconceptions surrounding tax extensions. First, what is an extension? An extension is a request for six additional months to file one’s tax return. Extensions are not tremendously complicated and are usually automatically approved by filing form 4868. Now, to the misconceptions!
1) An extension means I don’t have to pay my taxes until October.
False - An extension is an extension of time to file not an extension of time to pay. While it is difficult to calculate the exact amount of tax owed when extensions are submitted, it is important to estimate the tax due and pay it by April 15th. It is also acceptable to overpay with an extension ; in fact, it may be preferable. Estimating on the higher side will help reduce possible late payment penalties once the tax return is finally filed, and that money is not lost. If there is an over-payment, it will be refunded after the tax return is filed.
2) Filing an extension will increase my risk of IRS audit.
False - The IRS does not base its determination of an audit on whether a taxpayer files an extension or not. Interestingly, filing an extension may help lower the risk of an audit. This is because extending the time required to file provides more opportunity to gather materials and offers the CPA more time to prepare the return. It also pushes the tax return past the beginning-of-April rush when CPAs and IRS processors are crunched for time.
3) Extensions are only for “bad”/”lazy”/”indifferent” taxpayers.
False - Extensions are simply a request for additional time to submit one’s tax return. While some taxpayers request extensions to increase the time they have to gather their tax materials, other factors can contribute to the need for an extension. For example, if a taxpayer receives pass-through income and the pass-through entity files an extension, the entity will not provide necessary documentation until later in the year. The taxpayer has no alternative but to request an extension.
4) After my extension is approved, I cannot file my tax return until October 15th.
False - After an extension has been accepted, the tax return may be filed any time before the October deadline. It could even be filed before April 15th if it is complete. All an extension does is change the taxpayer’s filing due date from April 15th to October 15th. As noted above, tax payments are still due by April 15th.
5. My CPA will think poorly of me if I request an extension.
False - There are many reasons why taxpayers need extensions. Some may even choose extensions out of convenience. For the 2018 filing season, many more taxpayers were put on extension as a result of significant changes to the tax code, tax forms, and mid-season changes made by the IRS. Extensions are merely a new filing deadline and not a reflection of one’s character.