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 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 Oct. 15. But is taking one always a wise move?

An extension gives you extra time to file your return, but it doesn't give you any extra time to pay taxes you might owe on that return. Payments are still due by July 15, 2020 for tax year 2019, but an extension can at least help reduce your penalties if you can't afford to pay in full by that deadline.

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.

The Advantages of Asking for an Extension

You might not have a choice under some circumstances—you simply can't file by April 15 for one reason or another—but there are both pros and cons involved with filing for an extension. On the plus side, it can save you from a couple of headaches and it offers a few other perks as well.

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

You're Missing Tax Documents

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.

It Helps 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 .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 Oct. 15. The late filing penalty wouldn't begin until Oct. 15, assuming you don't file by that time.

It Preserves 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—April 15, 2020 for tax year 2019.

But the refund statute of limitations is also extended by six months when you file for 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.

Funding 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 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, 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—and if it's really in your best interest. Filing an extension gives you extra time to mull it over or to seek help.

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

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 potentially save money by shifting tax preparation to a time when their accountant is less busy and charging a lesser fee.

Reducing Your Risk of an Audit

An IRS audit becomes less and less likely as the year goes on. The IRS must conduct a certain number of audits each year, and odds are that the agency has hit that requirement by the time October rolls around. This isn't to say that you don't still have to be meticulously accurate when preparing your return, but the odds of fallout diminish if you do make a mistake.

The Disadvantages of Asking for an Extension

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

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 unless you're self-employed.

Switching from Joint to Separate Married Returns

Married taxpayers who file jointly before the April deadline still only have until April 15 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, according to the IRS.

You Might Confuse the IRS

The IRS will most likely think that 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 you ended up not filing, perhaps because you realized that you don't meet the income requirements so it's just not necessary.

It might be to your advantage to file a tax return even if you don't have to. You might qualify for the earned income tax credit if your income falls below the filing requirement. This is a refundable credit so the IRS will send you the money if you don't owe any taxes—but not if you don't file a return to claim it.

You Can't Recharacterize an IRA Contribution

You could 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 a Roth IRA contribution into a traditional IRA contribution, 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. Just make sure it's postmarked before April 15. You can't file an extension after this date.

Article Sources

  1. IRS. “Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return,” Page 2. Accessed March 13, 2020.

  2. Tax Relief Center. “The Pros and Cons of Filing a Tax Extension.” Accessed March 13, 2020.

  3. IRS. “Extension of Deadlines — Combat Zone Service.” Accessed March 13, 2020.

  4. IRS. “About Form 8892, Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax.” Accessed March 13, 2020.

  5. IRS. “Topic No. 653 IRS Notices and Bills, Penalties, and Interest Charges.” Accessed March 13, 2020.

  6. IRS. “Don’t Lose Your Refund by Not Filing.” Accessed March 13, 2020.

  7. IRS. “25.6.1 Statute of Limitations Processes and Procedures.” Accessed March 13, 2020.

  8. IRS. “Publication 560 (2018), Retirement Plans for Small Business.” Accessed March 13, 2020.

  9. IRS. “Traditional and Roth IRAs.” Accessed March 13, 2020.

  10. IRS. “Form 1040-X, Amended U.S. Individual Income Tax Return.” Accessed March 13, 2020.

  11. IRS. “Topic No. 429 Traders in Securities (Information for Form 1040 or 1040-SR Filers).” Accessed March 13, 2020.

  12. IRS. "IRA FAQS - Recharacterization of IRA Contributions." Accessed March 13, 2020.

  13. IRS. “E-services,” Page, 2. Accessed March 13, 2020.

  14. IRS. "Extension of Time to File Your Tax Return." Accessed March 13, 2020.