The Pros and Cons of Filing a Tax Extension

When You Need More Time to Finish Your Tax Return

Should You Get a Tax Extension?
Should You Get a Tax Extension?. Getty Images 

Filing an extension request using IRS Form 4868 asks the Internal Revenue Service to give you some additional time to file your tax return. Certain individuals –– such as members of the military serving abroad –– may receive an automatic extension without having to apply. Unless there are special circumstances, most extension requests will be honored. You don't have to explain why you need the extension.

An extension moves the filing deadline for personal tax returns from April 15 to Oct. 15. But is taking one a wise move? You might not have a choice under some circumstances, but there are both pros and cons.

While an extension gives you extra time to file your return, it does not give you extra time to pay your tax. Payments are still due by April 15, 2019 for tax year 2018. But an extension can help reduce your penalties if you can't afford to pay in full by the deadline.

The Pros of Filing an Extension

You'll Have 6 Extra Months to Finish Up

Having extra time to finish your return is often necessary if you're still waiting for tax documents to arrive in the mail or if you need additional time to organize your deductions. Extensions also provide extra time to file your gift tax return if you've been particularly generous during the year.

It Helps Reduce Late Penalties

The IRS basically imposes two types of penalties: a late filing penalty of 5 percent per month on any tax due as of 2018, plus a late payment penalty of a half percent a month.

If you file an extension and then file your return by the extended deadline of Oct. 15, you'll avoid the 5 percent per month late filing penalty. And the late filing penalty will begin from Oct. 15, which creates a deferral on this penalty if you file after Oct. 15.

It Preserves Your Tax Refunds

Some people end up filing several years late, and there's a three-year deadline for receiving a refund check from the IRS if it turns out that you're due one. This three-year statute of limitations begins on the original filing deadline—April 15, 2019 for tax year 2018.

But the refund statute of limitations is also extended by six months when you file an extension. This can preserve the ability of taxpayers to receive their federal tax refunds even if they're behind with submitting their tax returns.

It Gives the Self-Employed More Time to Fund Retirement Plans

Self-employed persons might want to fund SEP-IRAs, solo 401(k)s, or SIMPLE-IRA plans for themselves. Filing an extension provides these taxpayers with an additional six months to do so.

Solo 401(k) and SIMPLE plans must be set up during the tax year, but actually funding the plan can occur as late as the extended deadline for the previous tax year. Entrepreneurs can open and fund a SEP-IRA for the previous year by the extended deadline as long as they've filed an extension.

You Have Extra Time to Make Various Elections on Your Tax Return

A wide variety of decisions must be made when you're preparing your tax return, and it can take some work and maybe a consultation with a professional to determine whether you're actually qualified to take certain deductions and credits. Filing an extension gives you extra time to mull it over or to seek help.

Filing an Extension Can Improve the Accuracy of Your Return

There's an inevitable rush to get tax returns finished by the April deadline, and taxpayers and accountants alike can make tax filing mistakes when they're rushing. An extension gives you and your accountant extra time to go over the return and make sure everything is complete and accurate before sending it in.

Extensions Can Help Reduce Your Tax Preparation Fees

Some accountants raise their fees in the weeks leading up to the April deadline only to drop them again during the slow spring and summer months. Price-sensitive taxpayers can potentially save money by shifting tax preparation to a time when their accountant is less busy and charging a lesser fee.

The Cons of Filing an Extension

Extra Time to File Doesn't Mean Extra Time to Pay

An extension will give you extra time to file your return, but any tax you owe is still due by the original deadline. An extension can help reduce penalties, but any outstanding balance will still be charged a late payment penalty of 0.5 percent per month and interest.

There's No Extra Time to Fund an IRA

Contributions to a traditional IRA and Roth IRAs are still due by the original April deadline.

No Extra Time for Married Couples to Switch From Joint to Separate Returns

Married taxpayers who filed jointly by the April deadline still only have until April 15 to amend their tax returns to switch to the married filing separately status.

No Extra Time to Make the Mark-To-Market Election for Professional Traders 

You must make this election by the April 15 due date, according to the IRS.

You Might Confuse the IRS

The IRS might think that you need to file a tax return if you file an extension. If you end up not filing, perhaps because it turns out that you don't meet the filing requirements so it's just not necessary, the IRS might get confused and ask you to file a return anyway because you filed an extension to ask for additional time.

You Can No Longer Recharacterize an IRA Contribution

Before the enactment of the Tax Cuts and Jobs Act (TCJA), you could change the nature of your IRA by the October extended deadline as long as your IRA is funded by the April deadline.

You could essentially turn your traditional IRA contribution into a Roth IRA, or a Roth IRA contribution into a traditional IRA contribution, or even use this provision to recharacterize a Roth conversion back to a traditional IRA. However, under TCJA, as of January 1, 2018, conversions made after this date cannot be recharacterized.

Filing an Extension Is Pretty Easy

Extensions can be filed online. You'll receive a confirmation code from the IRS notifying you that your extension was received if you submit it electronically. Otherwise, you can just mail Form 4868 to the IRS.