Should you file an extension for your personal taxes? Contrary to popular opinion, it is not the end of the world if you don’t file your personal 1040 tax return by April 15th.
In fact, it can be very strategic to NOT file on April 15th and file an Extension instead. Here are the three main reasons to consider filing an Extension:
- It gives you time to dig up expenses for any business income
- Reduces your chances of an audit
- Allows you to get better support to file and not “Do It Yourself”
Bottom line, filing an Extension doesn’t cost you (unless you owe taxes and don’t pay), and it DOES NOT increase your chances of an audit!
When to Avoid Filing an Extension
However, sometimes filing an Extension is a bad idea. IF ALL 3 of the following apply, try to avoid an Extension and do your best to file your tax return by April 15th and be done with it:
- If you don’t have a small business, AND
- You’re due a refund, AND
- Your tax return is generally straightforward.
If all 3 above apply, then by Filing an Extension you are actually giving the IRS an “interest-free” loan. Get your refund and get out of there!
BUT again, if you have a small business on the side, don’t have a fat refund waiting for you, or want to upgrade to a better tax professional, filing the Extension will allow you to re-group. It’s not a big deal!
Reason #1 – Dig Up More Expenses as a Business Owner
If you had a small business, medium-sized business, side hustle, or simply received a 1099 last year for any extra income, it’s critical to dig up as many write-offs as you can.
Remember, when you have 1099 income, you are filing a Schedule C and have a small business!
Rather than rush and file by April 15th in a frenzy because your mom told you to file your taxes, take the extra time to comb through bank statements and credit card reports to find every legitimate expense you can. Check out my other article: “Last Minute Tax Strategies Before Filing”
Having a small business is a great way to make some extra income, take write-offs W-2 employees aren’t able to, and essentially have a lower tax rate on your business income. It’s the beauty of being a business owner.
However, it’s all for naught if you don’t take the time to identify all of the expenses you are entitled to and make sure they are on your tax return.
Reason #2 – Reduce Your Chances of an Audit
Many don’t realize that they reduce their chances of an audit by filing an Extension and filing their actual tax return later in the year.
The IRS generally works on a ‘first come first serve’ basis when it comes to assigning audits each year. There are 33 IRS districts in the 50 states and most IRS districts combine two or more states, but some populous states are divided into multiple IRS districts.
These ‘districts’ create a quota at the beginning of the year on how many audits are going to be ‘assigned’ and it’s well known that this quota fills up before the end of the extension period on October 15th. Now, this doesn’t mean that audits aren’t assigned after the Extension deadline, but after October 16th it’s up to the IRS computer systems to flag tax return issues.
Thus, by simply doing some math and assessing probability ratios, it’s again well recognized that the later a taxpayer waits to file (before the Extension deadline), the less chance they have of an audit.
If a taxpayer files after October 15th, essentially “late”, then their chances of audit actually DO exponentially increase. Remember, filing between April 15th and October 15th in 2024 is NOT “late” – it’s smart.
Reason #3 – Get better support to file and don’t DIY
Many American taxpayers rush to file their tax returns, even doing it themselves, because they can’t find a good professional to help them prepare their taxes. Don’t fall prey to this misconception.
Filing an Extension gives you time to find, interview, and upgrade to a better tax professional.
Keep in mind that many tax professionals aren’t interested in taking on new clients before April 18th. But after the deadline, a lot of tax professionals are willing to take on new clients and spread the work out over the year.
In fact, if you have been dreaming of having a tax professional that actually serves as a tax advisor, providing strategies and guidance to go to the next level, check out my Main Street Tax Advisor Network. Every Certified Tax Advisor listed in the Network is trained on the strategies I teach in my books and the strategies we consult on in the law firm.
Don’t ever feel pressured to file your taxes with a tax professional you don’t believe in. When in doubt, file an Extension and give yourself some time to find a real Tax Advisor and do it right.
You still may need to send in money
Remember, an Extension IS NOT an “extension” to pay any taxes you may owe, but an “extension” to file. Thus, it’s important to consider if you ‘owe’ and should send in some money with your extension.
If you’re not sure how much money you should send in with your Extension, see my other article “How Much Should I Send in with My Extension?”. You may not need to send in anything at all, but make sure you take a little time to do some calculations. I try to keep it simple with just a few general rules of thumb.
Always file an Extension EVEN IF you can’t pay your taxes!
If you filed your tax return by April 15th, then great. But if not, make sure to file an Extension no matter what. HERE’S WHY: The failure-to-file penalty (if you fail to file an Extension) is more expensive than not paying your taxes.
When you don’t file an Extension the failure-to-file penalty automatically kicks in!! This crapy penalty accrues at the rate of 5% per month, or part of a month, (to a maximum of 25%) based on the amount of tax you owe, plus interest on the penalty itself.
EXAMPLE 1.1: You end up owing $5,000 in taxes but didn’t file an Extension because you thought it was worthless to do since you didn’t have any money to send in. BAD MOVE! Let’s assume you finally file in July. The penalty for keeping the IRS in the dark is 20% (4 months x 5%), or $1,000 + interest! This penalty would disappear if you at least filed an Extension. Additionally, you owe penalties of $100+ interest for paying late!
EXAMPLE 1.2: Same situation. You end up owing $5,000 in taxes but you DID file an Extension. The penalty for not paying on time is 2% (.5% x 4), or $100+ interest. That’s right! The penalty for paying late is not as bad as not filing an Extension and getting hit with the failure-to-file penalty.
When you don’t at least file an Extension the IRS is “in the dark” and assumes the worst. Think of that first date you had when you promised to call that special someone back. If you don’t call (no matter how valid the reason) …they’re going to assume the worst. That ‘first date’ turns into the ‘last date’ faster than you can spell “text and swipe left”.
TIP: It’s easy to file an Extension. Simply go to the IRS website here and file Form 4868. Read the instructions on where to mail. Some companies may offer to do it for free, but there will always be a catch for them later to file your actual return or market you additional services. Just be careful.
In summary, the Rule of Thumb should be file an Extension, send in the appropriate deposit, dig up better records, file before October 15th, take comfort that your chance of being a target goes down, and you save more in taxes because you took your time.
Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP.
