The Pros and Cons of Getting a Tax Extension
What is a Tax Extension?
A tax extension is a simple form that you file with the Internal Revenue Service (IRS) to get an increase of time to file your tax return. You must complete form 4868 to get the automatic six month filing extension. This means your 2014 tax form will need to be filed by October 15, 2015 instead of April 15, 2015.
One of the most important things to know is that this is an extension for filing the tax paperwork but not for paying your taxes. You will still have to pay any owed taxes by April 15th or pay interest and payment penalties. You will need to do your best to estimate the amount of tax that must be paid. You can print out and file the required paper form by mail with a payment check, if needed, or you can file and pay electronically via e-filing. You can also pay by phone with a credit or debit card.
When An Extension is Useful
A tax extension can be a lifesaver if you simply require some additional time to get your tax paperwork together and properly complete your tax return. It is much better to get an extension rather than not filing a return or throwing together your return and potentially making serious mistakes. Not filing or filing improperly are great ways to get audited.
The IRS does not require any explanation of why you are requesting an extension, you just have to fill out the form and file it before the tax deadline. If you file for the extension before the April 15th due date you will avoid the late filing penalty. And if you make a proper payment, you will also avoid the interest and late payment penalty; that is if you correctly estimate your liability. Even if you miscalculate the amount, your prepayment will still lessen the interest and any penalties.
When an Extension is Not Recommended
The main reason to not request an extension is if you are going to get a large refund. Filing an extension in that situation basically just delays the return of your money. It allows the IRS to keep your money longer with no extra compensation. While the IRS charges you interest on late payments they do not give you any interest on the money they hold while you wait to file. In fact, if you are owed a large refund, you should probably change your withholding paperwork so that the proper amount is withheld and that should be done sooner rather than later.
If you are procrastinating and simply need a jump start then get to work and get that tax return done. You don’t want to be in this same position, six months from now, when there are no more extensions available. If you run into trouble or find you are missing some necessary papers, then you still can file for an extension before the 15th.
And if your return is complete but you cannot pay the full amount, do not file an extension. In this situation, the IRS says it is best to file, pay what you can, and make payment arrangements with them.
