Top Reasons Why You Might Need to File a Tax Extension
After the IRS postponed the deadline to file taxes in both 2020 and 2021, things have returned to pre-pandemic normalcy this year. Tax Day 2022 is April 18th in most states, or April 19th for taxpayers in Massachusetts and Maine (thanks to Patriots’ Day falling on the 18th). The filing deadline is also the deadline to request a tax extension. A tax extension gives you an additional six months to file a tax return. For 2022, this puts the extended tax deadline at October 17th. Tax extensions can be used by both individuals and businesses.
Requesting a tax extension gives you (and your tax advisors) more time to complete and submit your tax return, but it doesn’t give you more time to pay your taxes. The IRS expects taxpayers to pay their owed taxes by the original filing day, even if they haven’t filed returns. So Massachusetts taxpayers who owe 2021 taxes and don’t pay them before April 19th, 2022 will incur penalties plus interest on any unpaid taxes.
Common Reasons to File a Tax Extension
If it’s not a useful strategy for delaying tax payments, why might you need to file a tax extension?
- You don’t have all the information that you need to complete your return. Maybe you got started on your taxes late and didn’t realize you were missing a certain 1099 that you need to report investment income. Or, you’re waiting for corrected forms from your employer or bookkeeper. You could guess at the numbers, but if you’re wrong you’ll have to file a corrected return with the IRS. Both individual and business taxpayers can use tax extensions to make sure they have entirely accurate information before submitting their tax returns.
- You want more time to set up/contribute to a SEP IRA. If you’re a small business owner who contributes to employees’ SEP IRAs, or you’re self-employed and maintain your own SEP IRA, filing a tax extension gives you six extra months to make contributions. Any contributions you make to a SEP account for a given tax year are due when that year’s tax return is due. The tax return deadline is also the deadline for setting up a new SEP IRA. If you wanted to establish an account starting in tax year 2021, a tax extension would give you until October 17th, 2022 to do so.
- You don’t have the time or bandwidth to file your tax return before the deadline. Life happens. Maybe spring is a really busy season for your business, or you’re stretched thin between working and taking care of aging parents. Whatever the reason, sometimes an individual or business owner just can’t make the time to sit down with their tax advisor and complete their tax return before the filing deadline. Getting a tax extension and paying estimated taxes before the April deadline gives you six months of breathing room, and you can meet with your tax advisors in late spring or summer once your schedule opens up.
- You live outside the country on Tax Day. American taxpayers living abroad may automatically get a two-month tax extension, but can also file for the six-month extension to give themselves more time to consult with their American tax preparers.
How to File a Tax Extension
Individuals/sole proprietorships request a tax extension using IRS Form 4868, which can be submitted electronically using the Free File program. The IRS automatically accepts tax extension requests. You don’t need to do anything to prove eligibility for an extension, or wait to hear whether your request has been approved. Completing Form 4868 is as simple as providing your taxpayer information and paying your estimated taxes. Unless you make an error like mistyping your Social Security number, you can expect your tax extension request to be accepted.
Businesses that are organized as multi-owner LLCs or corporations generally file IRS Form 7004 for a tax extension. Or, a corporation that anticipates a net operating loss in the current tax year can file IRS Form 1138 to request an extension to pay the prior year’s taxes.
Always consult with your tax advisors if you need help estimating your owed taxes. The IRS imposes penalties for underpaying estimated tax, so you might save money in the long run by taking the time to work out an educated guess about how much your return will show you owe. Really, consult your tax advisors about any concerns you have about filing your tax returns. That’s what we’re here for.
Sachetta, LLC’s team of financial and tax advisors works closely with clients on tax preparation all year long. Any time you have questions about tax extensions or anything else related to your tax return, we’re happy to help. Contact us today.
Stephen Sachetta CPA, MST is a Certified Public Accountant and holds a Master’s Degree in Taxation. He has a diverse background of experience in the public accounting field over the past 40 years, ranging from the former Big 8 to being one of the founding partners of our firm. He specializes in the Restaurant and Food Service Industry and works with individuals and small businesses at developing them into flourishing companies while helping them to save tax dollars along the way.