As tax filing deadline is quickly approaching, many procrastinators and those who legitimately are just not ready to file their returns become stressed out and frantic, trying to meet what may virtually be an impossible deadline. Many would rather rush to get their returns prepared than file an extension. Common concerns include, but are not limited to, being flagged as a late filer, being assessed penalties, or being more likely to be audited. If you are one of these individuals, I hope that I can put your mind at ease and inform you of what it really means to extend your tax return and benefits of doing so.

A few notes before getting started:

•This article is written assuming a tax year that is same as calendar year, which is case for most individual taxpayers. •If a tax deadline noted falls on a holiday or weekend, deadline is actually next business day. •The focus of this article is on filing of federal individual extensions except where noted otherwise. •“Tax professional” as opposed to “tax preparer” is referred to in this article. My definition of “tax professional” is someone who has extensive knowledge, education, and experience in taxation and can provide tax consultation and planning services in addition to preparing returns. Two commonly recognized credentials held by tax professionals include CPA (Certified Public Accountant) and EA (Enrolled Agent). CPAs and EAs are by no means only tax professionals out there and not all CPAs do tax-related work.

With those preliminary notes out of way, I will now discuss what you should know about extensions.

What is an extension?

First and foremost, it is important to know that an extension is an extension of time to file an income tax return, not an extension of time to pay tax due. Unfortunately, many taxpayers miss part about it not being an extension of time to pay, perhaps due to wishful thinking.

There are two federal individual income tax extensions that can be filed. The first extension, which is “automatic,” is due by April 15th tax deadline and is a four month extension of time to file. Thus, if you file this first “automatic” extension, you will have until August 15th to file your income tax return. Your best estimate of tax that will be due with actual return is still due by April 15th.

As for first extension being “automatic,” that does not mean it just happens – you need to actually file extension. There are various ways to do so which are convenient and are discussed later. The reason it is referred to as “automatic” is that you do not need to provide an explanation for why you need additional time to file.

The second extension is not “automatic” like first one. If you cannot complete your returns by August 15th first extension deadline, you can “apply” for an additional two months. The second extension is considered an “application” because you need to provide a good reason why you need additional two months to file. You need to demonstrate that you made a reasonable effort to get your returns completed within first four month extension period or that you had extenuating circumstances. If reason is merely for your convenience, your request can be denied. If your application is denied, your return will be due immediately or within a 10-day grace period. If you did not timely file a first extension, a second extension will only be approved in cases of undue hardship.

Between two extensions, that gives you up to six months additional time to file beyond April 15th tax filing deadline. Six months is generally maximum total time a return can be extended by law.

Why should I extend?

The Internal Revenue Service prefers that you file a complete and accurate return. A return you have to rush through, do not have all information for, or make estimates of figures for is unlikely to be complete and accurate. Thus, it is better to file an extension if you are approaching April 15th and you do not have all information needed or otherwise cannot file complete and accurate returns.

If you use a tax professional and you are getting your tax information to him or her just a few weeks or so before April 15th, do not be surprised if he or she indicates an extension will need to be filed. You are more likely to have a complete and accurate return if your tax professional is not trying to rush to make April 15th deadline.

A few more comments for those of you who use tax professionals. If it is approaching tax deadline and you have not yet contacted your tax professional, do not be surprised if he or she is unable to speak with you when you call his or her office. Also, do not assume that just because you used his or her services last year they will file an extension for you without you specifically requesting it. Tax professionals are very busy dealing with many clients and working long hours all of tax season and they get even busier as April 15th approaches. Moving forward, you should consider getting in contact with your tax professional’s office well in advance of tax deadline to determine what he or she needs to file an extension, if necessary, and prepare your taxes.

In addition to having a complete and accurate return, there are certain planning opportunities that can be taken advantage of if you or your tax professional is not forced to rush through your return. One example is funding certain retirement plans such as SEPs and Keogh Plans – these can be funded for prior year through extended deadline of return that falls in current year. Some plans, such as a SEP, can actually be established for prior year up through extended due date of tax return. It is important to note that traditional and Roth IRAs need to be funded by April 15th to qualify as contributions for prior year. For more information on such planning opportunities for year just past as well as current and future years, you should consult with your tax professional.

What are common concerns over extending?

As referenced earlier, many individuals are adverse to even idea of extending due to concerns such as being “flagged” as a late filer, being assessed penalties, or being more likely to be audited. Filing an extension in and of itself is not going to raise any “red flags” or cause problems as long as your extension is timely filed and tax due is paid by April 15th. As for being audited, you are more likely to be audited if your return is incomplete, includes estimated figures, or is inaccurate.