During tax season, we get a lot of questions about extending your tax return and what that means or does not mean. This confusion can lead businesses and individuals to make incorrect decisions and assumptions when it comes to their taxes which can lead to further issues later on. Let’s take a look at what it means to extend your tax return and some of the common myths and misconceptions around extensions.
To start, extending your tax return is as simple as filing an extension form with the IRS and potentially with your state depending on what state you are in. With the IRS, this means filing a 7004 if you are a Corporation, S-Corporation, or Partnership or filing a 4868 if you want to extend your 1040 tax return. Both extension forms, if filed timely, provide you with an additional six months to file your tax return. The extensions are automatically given to you and you do not need to have a reason why you need to extend the tax return.
When we talk with clients or prospective clients, there tends to be some myths that exist surrounding extensions that we want to clear up. The three most common myths are as follows:
Myth 1: An extension means I will get audited or am more likely to get audited. We hear this one and variations of this one a lot and it’s not true. Your company or you individually will not automatically get audited if you file an extension and it does not increase your audit risk. In fact, it may even lower your audit risk. By filing an extension, you have more time to ensure that you get your tax return done correctly. Rushing a filing of a tax return will tend to cause you to make mistakes or not handle issues correctly, which can increase your audit risk.
Myth 2: Filing an extension gives me more time to pay the taxes that I owe. This is also not true. An extension is an extension to file a return, not an extension to pay taxes due. That means your tax bill due on April 15 is still due on April 15 if you file an extension. If you can’t pay your tax bill by the due date, our recommendation is to pay as much as you can and apply for a payment plan with the IRS. Paying as much as you can will reduce any penalties and interest you may need to pay and getting on a payment plan with the IRS will avoid notices you may get from the IRS.
Myth 3: You can file an extension whenever you want. The filing of the extension does need to be done by the filing deadline. This means S-Corps and Partnerships need to file extensions by March 15 and C-Corps and Individuals need to file by April 15. If you try to file an extension after that deadline, the IRS will not accept it. We see this come into play a lot with prospective clients wanting to file their S-Corp or Partnership tax return for the first time. They usually don’t realize that the filing deadline is a month earlier than their 1040 tax return deadlines and as a result they ask for an extension after the March 15 deadline. By that time, it’s too late.
At Lance CPA Group, we are a big fan of filing extensions. Instead of trying to make a mad rush to file a tax return, we think it’s better to take time to do the return correctly. This allows time for R&D Tax Credit studies to be completed and careful review to ensure that we are getting all of the necessary deductions. This also allows us to have consultative time with our clients during tax season as we have more time to better serve our clients. Filing an extension does not mean that the return won’t get done for months on end, rather, it gives time to do the best tax preparation and strategizing that we can.