CPA Gives Five Reasons You Should NOT Extend Your Tax Return
If you extend the filing deadline for your tax return from April 15th to October 15th, you've got lots of company. Some years, more than forty percent of taxpayers extend by filing the simple one-page 4868 extension form available from the www.irs.gov web site.
Note: Just for the record: Not all taxpayers use the 4868 form. Corporations, partnerships, trusts and estates and most other entities, for example, use the 7004 extension form, which is also available at the www.irs.gov website.
But in spite of the ease of extending--and despite the encouragement from some tax return preparers--five good reasons exist for not extending.
Reason #1: No Delay in Cash Outflow
You can't delay the payment of any tax you owe--only the filing of the actual return. And this rule means that, technically speaking, when you file your extension, you're supposed to pay any tax you owe.
Of course, paying the tax you owe means you need to do (or should do) most of the work required to file anyway.
And all this makes you wonder what extending really gets you. You're supposed to pay the tax on time anyway. And you have to go to most of the work anyway. Why not go to just a bit more work and file on time?
Reason #2: Lost IRA Deductions
Another reason not to extend concerns taking regular and Roth IRA deductions.
Lots of taxpayers like to decide at the very last minute, right before they file their return, whether or not to make an IRA contribution for the year the tax return is being filed for. And that makes sense. By looking at the tax return, you'll often know how much an IRA saves you in tax or whether an IRA provides a nice boost to your refund.
In many cases, too, taxpayers need to wait until the last minute to make an IRA contribution because they may not know if they're eligible to contribute until they tally all their income.
But extending creates a problem here. IRA contributions need to be made by the original due date of the return, or April 15. As a result, taxpayers who extend their return to October 15 often lose the opportunity to make a last-minute IRA contribution.
Reason #3: Late Input to Current Year Quarterlies
Extending a tax return deadline and then filing late creates another headache for taxpayers (like business owners and investors) who need to prepare estimates of their tax liability and then make quarterly payments.
Here's why: You can use information from the previous year's return to make quarterly payments for the current year. In most cases, for example, you can make quarterly payments equal to one-fourth of the previous year's tax liability. If you owed $20,000 in year 1, making $5,000 a quarter payments in year 2 will typically mean you avoid penalties for underpayment.
If you don't know your year 1 tax liability until close to October 15, however, you can't use that information to make your first three year 2 quarterly payments (due on April 15, June 15, and September 15).
And another point needs to be made about using the previous year's tax return information to help set the quarterly tax payment amount. If for the previous year you're going to get a refund, you can use that refund to reduce your quarterly payment for the current year.
For example, if you will owe $20,000 for the current year, but are entitled to a $5,000 refund for the previous year, you can use that refund to make your first quarter payment. Or at least you can if you file on time.
Note: If your income is high, you may be required to make quarterly payments equal to 110% of the previous year's tax liability in order to avoid underpayment penalties. Consult your tax advisor for more information.
Reason #4: Delayed Refunds
While we're on the subject of refunds, let me a quick observation. In many cases, perhaps even half the time, late filers get refunds.
That means that by filing late, a taxpayer delays their tax refund. And that doesn't make any sense. Why loan the government your money interest-free?
Reason #5: Greater Chance of Error
One final, big reason exists for not extending a return and then filing late if you use a tax return preparer.
If you force your preparer to do your return very late in the extension season--say in September or, heaven forbid, October--you greatly increase the chances your return will contain a preparation error. And, what's more, you will almost surely receive poorer service.
At the end of the extension tax season, your tax return preparer will be rapidly preparing returns for people who haven't been able to get themselves organized until 8 or 9 months after the tax year ends. Automatically, that last-minute hastiness means the taxpayer will turn in incomplete information, that the return preparer and taxpayer will communicate less effectively, and that income and deduction items will get missed or be dealt with incorrectly.
About the author:
Seattle tax accountant Stephen L. Nelson is the author of a bunch of downloadable ebooks about incorporating a small business.