Today we are going to be talking about filing an extension. Before you panic, we are going to go through some of the reasons why it may be advantageous for you to file an extension and also dispel some of the rumors and myths around filing an extension.
First, I would like to share my personal experience with you, I have had a lot of new clients over the years tell me that they could not file an extension, absolutely not, no way. And I always ask, why? I get answers like, “if I file and extension, it will draw a red flag”, “if I file an extension, that will make me more likely for audit”, “if I file an extension, my name will move up to the top of the list to audit”, “it causes a penalty”, or any other host of negative things that people have been falsely led to believe or that people have heard over the years.
Well, I am here to tell you, filing an extension (FYI, an extension can be obtained electronically) does not make you more likely to be audited and it also does not raise red flags for you. Nor does it inherently cause a penalty, although we are going to chat in a second about what you need to do when you file an extension to avoid any interest, charges or penalties.
First of all, businesses, individuals, trusts all can file for an extension. An extension is usually an automatic six month period of time under which you have to file your tax return. Notice I said file. One of the other misconceptions that I often hear is that filing an extension gives you an extension of time as well as an extension to pay any taxes that may be due. Unfortunately, as much as it pains me to say, the extension does not give us more time to pay, it only gives us more time to file.
It really is not a bad thing to file an extension. If you are working with a competent CPA and you need some more time to get your records together, or you need some more time to research something, or you are waiting to see what is going to happen with a particular tax law (it is not common, but it has happened). These can all be reasons to consider filing an extension if necessary. A CPA can help you determine if an extension is in your best interest, or if it is and better just to go ahead and file before the deadline.
As I said earlier if you are going to file an extension, you do not get an extension of time on paying your taxes. Therefore, you need to know with pretty close accuracy what your tax liability for the year is going to be. Especially because with that extension, a lot of people need to send payments to cover their liability. If you do not, do not worry, do not freak out. It may not be a bad thing at all because if you miscalculate, you are charged with interest and penalty, but those rates in some people's mind are low enough to cause them to consider paying later and maybe letting the IRS be their banks so to speak. There are some pretty interesting contrast when you do calculations between the interest and penalty rates and what the rate would be from a bank.
I am most certainly not saying, do not pay your taxes or file your returns on time. I am saying you should be sitting down with a CPA to talk about your options and to determine the best course of action that fits your situation.
If you have any questions, comments, or ideas for future videos, please let us know.