Is this the year you should file an extension? This is a question that annually repeats itself. And for each individual, the answer will be different. Some prefer to procrastinate or delay in favor of more time. Others prefer to file on the first day they receive their forms. And then there are many individuals who have to wait extended periods of time just to get the forms they need and then schedule a meeting with their tax advisors. Personally, I file my taxes immediately as the stress of waiting is unbearable. This year, though, I wanted to stay open minded and explore all of the potential benefits and consequences for filing an extension.
Knowing the Facts
My first thought was it would be really nice to delay paying any taxes I owe for an extra six months. An extension would allow me to file my 2016 taxes on October 17 instead of April 18. But, as it turns out, the IRS still expects me to pay the money I owe them on April 18. Even if I file the Form 4868 to extend the filing deadline, I am required to pay what I believe I will owe on April 18. If I don’t pay, I will suffer the wrath that is a .5% penalty per month until the taxes are paid. The penalty even increases to 1% per month if I don’t pay my taxes within 10 days of receiving an IRS notice to levy property.
If I fail to file my taxes by either the original April 18 deadline or the October 17 extension date, an additional penalty kicks in pushing the penalty to 5% with a maximum of 25%. And to boot, I will be charged interest for the amount owed on my taxes as well. Sounds like a lot of bad news, right? Yes it is. But the good news in all this is you can automatically get approved for an extension when you file Form 4868, or by making your estimated tax payment by debit card prior to the filing deadline.
Are You Procrastinating?
If you managed to make it through the last few paragraphs and are still willing to run the gauntlet of different deadline dates, penalties, interest, and potential IRS levy’s, it’s probably a good idea to understand the psychology behind procrastination to know if that your motivation behind filing a tax extension. By definition, procrastination is intentionally putting off doing something that should be done. Filing an extension is not always procrastination, but if there is no real benefit to delaying your tax filing, it may be. Researchers have determined that habitual procrastinators have higher rates of depression, anxiety, and illness. Procrastination may have positive short term effects initially in mood and overall anxiety, but individuals tend to show higher rates of anxiety and illness as deadlines draw near. Individuals who do not procrastinate, show similar symptoms as they are completing the inevitable task, however they are not as extreme and do not have the same long-term effects.
When it Makes Sense to File an Extension
Let’s move on to practical reasons for why it may be a good idea to file an extension. Obviously based on previous information, filing an extension and not paying is less costly than no extension and not paying. In fact, it is 10x less costly, as it is a 5% penalty if you miss the filing deadline versus .5% for filing and just not paying.
Sometimes life-changing events such as military leave, natural disasters, or having a child could be very good reasons to file for an extension because the extension grants you the time for what is important now, and provides the time to get your taxes filed at a later date when your circumstances have likely settled.
Or maybe you do not have the funds available to pay the taxes on a Roth conversion, and you need the time to complete a recharacterization. To put that in English, you wanted your Traditional IRA to become a Roth IRA. But, when you saw the tax bill on this action, you said no thanks and told your broker to pretend your request never happened and that you’d like it to stay a Traditional IRA.
Perhaps you don’t have all the forms necessary to complete your taxes, this is another common reason to file an extension. It is important to note you still need to pay what you believe you may owe by the tax deadline, even if you do not have all the required forms in time to be precise, or you may be subject to pay penalties and interest.
Honestly Evaluate Your Circumstances
So, in short, life happens and sometimes it can be unpredictable and will leave you unprepared to meet the given tax deadline. You may need to file an extension. If so, do it. Just make sure you pay your expected taxes by the deadline or penalties may incur. Be honest with yourself and know when you are procrastinating with your tax filing. Whenever it is avoidable, try not to procrastinate as it may carry some unintended health consequences with it. And if worse comes to worst and you can’t pay your taxes, it is always better to file your taxes anyway and pay the taxes as soon as you are able to.
How Can We Help
If you have any questions client services are always available 24/7. To speak with a Tax Services Representative, call 800-669-3900 Monday through Friday. 9 a.m. to 5:30 ET.