Not everyone’s reason for filing a tax extension is the same. Yet there are at least five popular reasons why individuals and businesses file tax extensions every year. All these reasons are perfectly acceptable to request an extension, yet remember there are no eligibility requirements for filing an extension – you can file an extension simply because you feel like it.
Avoid High Fees & Interest
One of the most popular reasons to file a tax extension is because it helps you avoid the IRS’ failure-to-file penalty. Whether you cannot file your tax return because of missing information or you cannot fully pay your tax liability, an extension will help you steer clear of the costly late filing fee.
If you don’t pay your taxes on time, but you still file a tax return, you will be subject to a 0.5% monthly payment penalty (based on the amount of your unpaid taxes). But if you also fail to file on time, your penalties will skyrocket to 5% per month, up to a maximum of 25%. Filing a tax extension means you can avoid these high fees.
Waiting for Information
The second most popular reason for filing a tax return extension is that you don’t currently have all the necessary information to file a complete and accurate tax return. This can be especially true for businesses. If this is the case, it’s in your best interest to apply for an extension and give yourself more time to file. That way, you can be sure that your tax return is properly prepared and submitted with all the necessary supporting documents.
Avoid an Audit
Some individuals and businesses file tax extensions to possibly avoid a tax audit. The IRS auditing department flags certain tax returns based on a complex algorithm. Although this algorithm is a secret, there are many speculations that the auditors themselves have certain quotas to fill each year. Most tax professionals estimate that IRS audit quotas are filled by the end of April’s tax season. Therefore, if you get a tax extension and file your return several months after the peak of the season, you could avoid IRS scrutiny.
Out of the Country
Another very popular reason for filing a tax extension is because you will be out of the country when the normal deadline arrives, making it impossible for you to properly file your tax return with the right documents or information. In any situation where you anticipate having difficulty in meeting the regular deadline, it’s a good idea to file an extension to be safe.
Want More Time
Of course, there are also individuals who simply want to prepare their taxes on their own schedule. The first few months of the year can be hectic, so why not give yourself more time for your taxes? Filing an extension is an easy option for those who are in no rush to file their return.
No matter what your reason is for requesting a tax extension, it’s important to understand that an extension will only give you more time to file your return. It does not give you more time to pay your tax liability.
To request a personal tax extension, file Form 4868 by the original due date of your tax return. To request a business tax extension, file Form 7004 by the original due date of your business return. Forms 4868 and 7004 can be filed by paper mail, or you can e-file an extension online.