SHOULD YOU SKIP FILING YOUR TAX RETURN ON APRIL 15? An extension is your way of asking the Internal Revenue Service for additional time to file your tax return. The IRS will automatically grant you an additional six months to file your return. An extension basically extends the filing deadline for personal tax returns from April 15th to October 15th. Businesses can also request an extension, which pushes their deadline to September 15th. BIG NOTE: While an extension gives you extra time to file your return, an extension DOES NOT give you extra time to pay your tax. Payments are still due by April 15, 2014 for the year 2013. AN EXTENSION ISNT AN AUTOMATIC AUDIT RED FLAG. Its commonly believed that the IRS frowns on tax extensions and is less likely to treat extended returns in a favorable manner. If that were the case, however, why would they offer an automatic 6-month tax extension to anyone who files for it, with no questions asked? Additionally, by filing for a tax extension you are actually demonstrating compliance with IRS regulations. Most of the time, an extension reduces your audit risk. It is widely known that the IRS has an audit quota which begins around tax filing season. Some theorize that these quotas get filled well before the tax extension deadline in October (or September for certain business tax extensions). Thus, when the surge of tax season is over and the tax returns which have been approved for extensions are finally submitted, the IRS has less incentive to put those returns in their audit pile. There is some discussion as to whether or not this is true, but filing a tax extension certainly wont single you out for unfavorable treatment by the IRS. Approximately 11 million taxpayers filed a tax extension last year, including individuals as well as businesses. BENEFITS OF FILING AN EXTENSION 6 EXTRA MONTHS TO FINISH YOUR TAX RETURN. Having extra time to finish your return is often necessary, especially if you are still waiting for tax documents to arrive in the mail or you need additional time to organize your tax deductions. Extensions also provide extra time to file your gift tax return. HELPS REDUCE LATE PENALTIES. There are two basic penalties the IRS typically imposes: a late filing penalty of 5% per month on any tax due plus a late payment penalty of half a percent per month. If you file an extension and then file by the extended deadline of October 18th, youll avoid the 5% per month late filing penalty. If you file after October 15th, the late filing penalty will begin from October 15th, which creates a deferral on this penalty. PROVIDES EXTRA TIME FOR SELF-EMPLOYED PERSONS TO FUND A RETIREMENT PLAN. Self-employed persons may want to fund a SEP-IRA, solo 401(k) or SIMPLE-IRA plan for themselves. Filing an extension provides these taxpayers with an extra six months to fund their retirement plan. Note: solo 401(k) and SIMPLE plans need to be set up during the tax year (2011), but actually funding the plan can occur as late as the extended deadline for the previous tax year. With a SEP-IRA, however, entrepreneurs can open and fund a SEP-IRA for the previous year by the extended deadline as long as they filed an extension. ADDITIONAL TIME TO RECHARACTERIZE AN IRA CONTRIBUTION. As long as your IRA is funded by the April deadline, you can change the nature of the IRA by the October extended deadline. Essentially, you can turn your traditional IRA contribution into a Roth IRA, or a Roth IRA contribution into a traditional IRA contribution. This is helpful if youre not sure if your eligible for one type of IRA. You can even use this provision to recharacterize a Roth conversion back to a traditional IRA. PROVIDES ADDITIONAL TIME TO MAKE VARIOUS ELECTIONS ON YOUR TAX RETURN. There are a wide variety of decisions that can be made on the tax return, such as deciding whether to depreciate equipment or take a Section 179 deduction, and whether to carryback or forward any business losses. Those decisions must be made when the tax return is filed. Filing an extension gives you extra time to make those decisions. FILING AN EXTENSION CAN IMPROVE THE ACCURACY OF YOUR RETURN. Theres an inevitable rush to get tax returns finished by the deadline, and taxpayers and accountants alike can make mistakes when rushing. With an extension, this gives you and your accountant extra time to go over the return and make sure everything is complete before sending in the return. IS THERE A DOWNSIDE TO FILING AN EXTENSION? EXTRA TIME TO FILE DOESNT MEAN EXTRA TIME TO PAY. An extension will give you extra time to file your return, but any tax is still due by the original deadline. An extension can help reduce penalties, but any outstanding balance will still be charged a late payment penalty (0.5% per month) and interest (right now at 3% annually). AN EXTENSION WONT GIVE YOU EXTRA TIME TO FUND AN IRA. Contributions to a Traditional IRA and/or Roth IRA are due by the original April deadline.
Posted on: Tue, 04 Mar 2014 22:26:39 +0000
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