The Pros and Cons of Filing a Tax Extension

When You Need More Time to Finish Your Tax Return

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Filing a tax extension request using IRS Form 4868 asks the Internal Revenue Service (IRS) to give you additional time to file your personal tax return.

An extension moves the filing deadline from April 15 to October 15, but it doesn't give you extra time to pay taxes you might owe on that return.

Is taking one always a wise move?

In 2021, most taxpayers receive an automatic extension on filing and paying their taxes. All individual tax returns are due on May 17, 2021, rather than April 15. Individuals and businesses in Texas, Oklahoma, or other areas impacted by winter storm emergencies, have until June 15, 2021, to file. For individuals and businesses in Louisiana, New Jersey, New York, and Mississippi who were affected by Hurricane Ida, the filing date is further extended to January 3, 2022.

Approval Is Usually Automatic

Most extension requests will be honored automatically; you don't even have to explain to the IRS why you need the extension. Simply file the form.

But file it correctly: double-check your Social Security number and other data. Erroneous information can trigger a rare rejection.

Certain individuals—such as members of the military serving abroad—receive an automatic extension without having to apply or File Form 4868.

If you do still decide to file for an extension in 2021, note that you automatically have until May 17 or June 15 to file, depending on where you live. And if you were affected by Hurricane Ida, you have until January 3, 2022.

Advantages

You might not have a choice under some circumstances. 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. However, there are both pros and cons involved with filing for an extension.

Reduce Late Penalties

The IRS imposes two types of late penalties: 5% on any tax due for each month or fraction of a month that a tax return is filed late without an extension request, plus a late payment penalty of 0.5% a month, up to a maximum of 25%.

You'll only have to deal with one of these if you ask for an extension, and even then only if your return indicates that taxes are due, and you don't pay at the time you file Form 4868.

You'll avoid the 5% per month late-filing penalty if you file for an extension, then file your return by the extended deadline of October 15. The late-filing penalty wouldn't begin until October 15 if you don't file by that time.

Preserve Your Tax Refund

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 for that year (usually April 15).

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

Fund a Self-Employed Retirement Plan

Self-employed persons might want to fund SEP IRAs, solo 401(k)s, or SIMPLE IRA plans for themselves. Filing for 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.

Independent contractors and other self-employed taxpayers can open and fund a SEP-IRA for the previous year by the extended deadline as long as they've filed an extension.

Extra Time to Make Elections

A wide variety of decisions must be made when you're preparing your tax return. 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—and whether it's really in your best interest.

Filing an extension gives you extra time to mull it over or to seek help.

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 hurried and under pressure.

An extension gives you or your accountant extra time to go over your return to make sure everything is complete and accurate before you send it in.

Extensions also provide extra time to file your gift tax return if you've been particularly generous during the year.

Reduce Your Tax Preparation Fees

Some accountants and even tax preparation software are free to 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 save money by shifting tax preparation to a time when their accountant is less busy and charging a lower fee.

Disadvantages

An extension won't address all your tax dilemmas. Some deadlines remain carved in stone, regardless of when you file your return.

No Extra Time to Fund an IRA

Contributions to a traditional IRA and Roth IRA are still due by the original tax deadline (usually April 15) unless you are contributing to a SEP-IRA.

Switching From Joint to Separate Married Returns

Married taxpayers who file jointly before the April deadline still only have until April 15 (unless you are subject to a disaster relief exception) to amend their tax returns to switch to the married-filing-separately status.

The Mark-to-Market Election for Professional Traders 

You must make this election by the original April 15 due date (unless you are subject to a disaster relief exception).

You Might Confuse the IRS

The IRS will most likely think you have to file a tax return if you ask for an extension. The agency might ask you to file a return anyway, because you filed an extension to ask for additional time, then ended up not filing—perhaps because you realized that you don't meet the income requirements.

You might want to file a tax return even if you don't have to. If you qualify for the earned income tax credit (EITC), which is a refundable credit, the IRS will send you the money even if you don't owe any taxes—but only if you file a return to claim it. This is especially true in 2021, when the American Rescue Plan has expanded eligibility for the EITC in response to economic hardships caused by the COVID-19 pandemic.

Can't Recharacterize an IRA Contribution

You were able to change the nature of your IRA by the October extended deadline before the enactment of the Tax Cuts and Jobs Act (TCJA) as long as your IRA was funded by the April deadline. You could essentially turn your traditional IRA contribution into a Roth IRA, or vice versa, or even use this provision to recharacterize a Roth conversion back to a traditional IRA.

Unfortunately, conversions made after this date cannot be recharacterized under the TCJA as of January 1, 2018.

How to File an Extension

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

Most reputable tax preparation software is set up to file an extension for you as well. Otherwise, you can just mail Form 4868 to the IRS.

Make sure it's postmarked by that year's tax deadline. You can't file an extension after that date.

Frequently Asked Questions (FAQs)

Is there a penalty for filing for an extension on taxes?

There isn't a penalty for filing for an extension on taxes, but you are expected to pay any taxes due by tax day. If you don't pay taxes on time, you will incur late penalties, but you can avoid these penalties by setting up a payment plan with the IRS.

How do I know whether my tax extension was accepted?

As long as you filed the extension correctly, it will be accepted. The easiest way to confirm that this process goes smoothly is to use a tax software service that confirms your extension once it goes through. If you file on your own, you can call the IRS customer service line (800-829-1040) to confirm that you filed correctly.