As the tax filing deadline approaches, it’s important to explore all your options to ensure a smooth and strategic filing process.
One often-overlooked choice is filing for a tax extension. In this post, we’ll break down the benefits and drawbacks of requesting an extension, covering key factors like potential penalties, payment obligations, SEP-IRA contributions, and common misconceptions about IRS audits.
Pros:
More Time, Less Stress: One of the most apparent benefits of filing a tax extension is the extra time it affords you. Filing a tax extension provides an additional six months to file your return, moving the deadline from April 15 to October 15.
Avoid Penalties: Filing for an extension can help you avoid specific penalties if you can't file your return by the original due date. However, it's important to note that this extension only extends the time to file, not the time to pay any taxes owed. To avoid penalties and interest, you should pay any estimated tax liability by the original filing deadline.
SEP-IRA Contributions: Are you a small business owner, or a self-employed individual looking to maximize your retirement savings? Filing a tax extension gives you extra time to make contributions to your SEP-IRA for the previous tax year, potentially reducing your taxable income and boosting your retirement savings.
Cons:
Potential Penalties for Late Payment: While filing for an extension gives you more time to file your return, it doesn't extend the deadline for paying any taxes owed. Failure to pay your taxes by the original due date can result in penalties and interest accruing on the unpaid amount.
Payment Considerations: If you anticipate owing taxes, it's essential to make a reasonable estimate of your tax liability and pay as much as you can by the original due date to minimize penalties and interest. If you can't pay the full amount, consider setting up a payment plan with the IRS to avoid further financial strain.
Risk of IRS Audit: A common misconception is that filing for a tax extension increases your chances of being audited by the IRS – there is no evidence to support this claim. The IRS conducts audits based on specific discrepancies or red flags in your tax return, rather than whether you filed for an extension. As long as you're accurate and honest in your reporting, there's no need to fear an audit simply because you filed for an extension.
Filing a U.S. tax extension can be a valuable tool for taxpayers who need extra time to gather information or make strategic financial decisions. However, it's essential to weigh the pros and cons carefully to avoid any potential penalties or complications.
Our team at Angolano & Company is here to support you every step of the way – reach out to us for expert guidance and personalized solutions!