If you’re a regular reader, you were likely expecting a reminder about filing for an extension during tax season. If I had to guess, you thought it might pop up in April—not at the beginning of March.
I’m doing things a little differently this year. And there’s a reason. I want to change the narrative that suggests that filing for an extension during tax season is an act of desperation. It’s not. It can be—and often is—the result of careful tax planning.
It’s true that some taxpayers who file extensions do so because they waited until the last minute. But increasingly, taxpayers are using extensions as an opportunity to step back and review their finances before filing.
Traditionally, about 10 million taxpayers file extensions, but that number appears to be climbing. The IRS reported that 18.95 million extension requests were filed in 2022, and I expect that number to increase as the season rolls through 2023.
Filing For An Extension Can Make Good Tax Sense
It gives you time to confirm that you’ve received all your forms. It’s true that employers are supposed to provide employees with Forms W-2 and other wage statements by Jan. 31, 2023, but some other forms—like Forms 1042-S, 1095-C, and some Forms 5498 may not show up until much later. There may be other reasons that a form hasn’t hit your inbox yet—you could be a beneficiary of a trust or estate or a shareholder or partner in a pass-through entity which means that Schedules K-1 associated with those returns aren’t yet available. Or, you might be funding an IRA and need to include that information on your form 1040.
Speaking of funding an IRA—as a general rule, you have until Tax Day—you may want to look at your financial picture to confirm how much to contribute. Making that contribution can not only help you sock away money for retirement, but may result in a tax break. But this is where patience is helpful: underfunding can cheat you out of tax benefits, while overfunding can result in a penalty.
You may need time to look at your tax return. So often, we’re just rushing from one task to another—but taking the time to scan your return and check for omissions or errors is smart. This is true even if your returns are prepared by a paid professional. If you get the returns a few days before the due date, there’s typically no advantage to rushing them out the door.
In some years, your return is simply more complicated than others. Not sure if you’ve included all of those crypto transactions? Sold your house and not sure about the basis? Forgot that you inherited an IRA? So many things can happen during any given tax year that are different from the previous year. Taking the time to run down the list of what you should have included can help avoid a nasty penalty later.
And what if you want to discuss your returns with your tax preparer? Most professionals won’t have the time for a lengthy sit-down around tax day. Taking time after Tax Day to review returns for completeness and ask questions about any items you may not understand can pay off down the line.
Or what if you’re just not ready? Maybe your receipts are still in boxes. Maybe you haven’t been well. Maybe your kid is graduating from high school, and you’ve just been overwhelmed. Sometimes, life gets in the way. The IRS understands that there are reasons why you may need more time to file. But whatever your reason for not being ready to file is yours. The great thing about filing for an extension is that you don’t need to tell anyone—even the IRS—why. It’s a no-questions-asked form, and the extension is granted automatically if you follow the rules.
Plus, contrary to popular belief, filing for an extension isn’t an audit trigger—and it tends to result in faster processing times than filing now and fixing any issues later. While taxpayers can now file amended returns electronically, the processing is still done manually, resulting in lengthy delays. Filing for an extension and filing a complete, accurate tax return later tends to be a more efficient option.
How To File For An Extension
To file for an extension, you can:
- File for an extension online for free using FreeFile on IRS.gov (you can use FreeFile to e-file an extension for free even if you don’t otherwise qualify to use the software);
- Ask your tax preparer to file an extension for you;
- File using tax prep software; or
- Complete and mail Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
The regular “timely filing” rules apply so be sure and get your extension postmarked or e-file accepted by the end of the day on Apr. 18, 2023. Assuming you’re on time, you will have six more months to get your return to the IRS and not be subject to the late-filing penalty. This year, with an extension, you’ll have until Oct. 16, 2023, to timely file a return (Oct. 15 falls on a Sunday).
You May Need To Pay
Remember that an extension is an extension of the time to file and not an extension of time to pay. If you expect to owe at tax time and you’re filing for an extension, you should make a payment with your extension request to avoid interest and penalty later. The interest rate is the federal short-term rate plus 3%, compounded daily, and the late-payment penalty is usually 0.5% per month.
Some taxpayers get an automatic extension of time to file without having to file for it. Those include:
- If you’re a U.S. citizen or resident and you live outside of the U.S. or Puerto Rico, and your main place of business or post of duty is outside of the U.S. or Puerto Rico or if you are active duty military and live outside of the U.S., you qualify for a two-month extension without having to file form 4868. That moves your due date to Jun. 15 to file and pay. However, interest is still due on any tax payment made after Apr. 18.
- Members of the military and others serving in combat zones or hazardous zone areas generally have until at least 180 days after they leave the zone to file returns and pay any taxes due.
- Taxpayers affected by natural disasters may have extra time. That currently includes recent extensions for taxpayers in most of California and parts of Alabama and Georgia. For more details or to see if you’re eligible, check the disaster page on the IRS website.
Complete, Correct Returns Are Better
While it’s always a relief to have your tax return over and done with by Tax Day, it’s not the end of the world if that doesn’t happen. And in some instances, it’s a smarter move. It’s always better to file a complete, correct return on extension than a rushed, flawed return by Tax Day. So go ahead, file for an extension. You don’t have to explain. We get it.