For some taxpayers, requesting a tax return extension is a regular, yearly occurrence. Yet for others, the notion of requesting time beyond the original due date is outlandish. And there also are those for whom the decision to extend comes down to the wire, determined by whether the return can be filed by the original due date. However, an extension of time to file generally should be considered for every tax period for which an extension is available, regardless of whether you intend to file on or before the original due date of the relevant income tax return.
When is an extension a good idea?
- For individual taxpayers who are unable to pay by the original tax due date, filing an extension can save the higher failure-to-file penalty (at 5% of the tax shown or assessed on the return, per month or portion of a month, with a 25% cap), as long as the extension is filed by the original due date and the return is filed by the extended due date. The failure-to-pay penalty (at 0.5% of the tax shown or assessed on the return, per month, with a 25% cap) will be imposed until the tax is paid.
- If incomplete documentation prevents you from filing an accurate return, an extension can allow you to file your return by the original deadline, and then file a superseding return within the extended period to correct any errors or omissions or replace any estimated numbers and have the subsequent return be treated as the return for the tax year, i.e., a superseding return.
- Taxpayers who file international returns may not have enough information to file a complete and accurate international return by the original required filing date. If an initial return is filed without required forms and information, an extension can provide needed time in which to file a superseding return with the proper information.
- Unexpected life events can happen. Even if you intend to file your federal tax return by the deadline, unforeseen events may cause you to prepare in a rush while you tend to other issues. Once a timely extension is posted, you have an extended filing period in which to correct any errors. As noted above, an extension generally does not extend the time in which to pay; however, where payment of any balance due is not the issue, an extension will allow a taxpayer to file an omitted information return or make a valid tax election that may not have been an option without the extension.
How it works
Taxpayers can file extensions electronically or by paper. If the IRS rejects the electronic filing because of, for example, a mismatch of information, the taxpayer can resubmit or file by paper. When an extension is paper-filed, it is input by IRS personnel to the taxpayer’s account.
A last word about penalties
Even if you obtain an extension to file, you must still pay your individual income tax in full by the April deadline in order to avoid a failure-to-pay penalty and interest.
For corporate taxpayers, if at least 90% of the tax shown on the filed return is not paid with the filing of the extension by the original due date, the extension will not be approved, possibly causing a failure-to-file penalty to be assessedâ€”in addition to the failure-to-pay penalty and interest.
For individual taxpayers, however, an extension may be approved regardless of payment of any balance due by the original due date. During periods where both the failure-to-file and failure-to-pay penalty apply, the maximum for both penalties together is 5% per month, effectively reducing the failure-to-file penalty to 4.5% per month. Where both penalties apply to their maximum amounts, the total will reach a combined 4.75%.
Filing an extension is not an uncommon practice for many business reasons, and it doesnâ€™t make a taxpayer more likely to be selected for an audit. Your tax advisor can provide guidance that carefully considers your individual situation and overall business picture.
For more information on REDWâ€™s tax advisement and support services, please contact Sandy Abalos.
This blog was adapted from an AICPA article that appeared in the August 2017 issue of The Tax Adviser. More details from the article are available here.