Filing your individual tax return, no matter how complex or relatively simple, can be very time consuming. Applying for an extension from the Internal Revenue Service is a way to give yourself an additional six months to get all of your paperwork in order. Do keep in mind, however, that if you owe the IRS money, you have to pay the IRS by the April 15 deadline. Still, an extension can help reduce your penalties if you’re unable to pay the full amount owed by April 15.
There are two basic types of penalties the IRS imposes – a late filing penalty of 5 percent per month, and a late payment penalty of 0.5 percent each month. Filing an extension can modify that a bit. If you file an extension and then file your return by the later deadline of Oct. 15, you’ll avoid the 5 percent monthly late filing penalty and the late filing fee will start on Oct. 15, which creates a deferral on the penalty, according to tax officials.
In some cases, people file years later, but note that there is a three-year statute of limitations for receiving a refund. For example, if your 2019 return is filed April 15, 2020, you have until April 15, 2023 to file a return for a refund.
The refund statute of limitations is also extended by six months when you file an extension, the IRS says. So, a taxpayer can retain his or her federal refund even if they’re filing a late return. Another benefit of filing an extension, financial advisors say, is it gives self-employed people extra time to contribute to their retirement plans. While the plans must be established during the tax year, filing an extension gives a business owner more time to fund it.
Other potential benefits of filing an extension include improving the accuracy of your return, as you take more time to scrutinize your filing, and helping reduce your tax preparation fees, according to tax advisors.
Of course, there’s the downside to filing an extension too. Keep in mind, an extension doesn’t mean you have more time to pay. An extension can help reduce penalties, but any outstanding balance will still accrue a late payment penalty of 0.5 percent per month, plus interest.
You should keep in mind that contributions to a traditional IRA and Roth IRA are still due by April 15. It is worth noting that you can still re-characterize an IRA contribution. However, you can no longer convert an IRA to a Roth and re-characterize it back to a traditional IRA at a later date.
So, while extensions can be beneficial for some, they do also have some drawbacks. If you need assistance with determining whether an extension makes sense for you, please contact a tax advisor at Diamond & Company CPAs. We are here to help!