Filing an Extension May Make Sense for You

Filing an Extension May Make Sense for You – What to Know About Your 2021 Filings
The past two years have been a challenge for taxpayers and tax preparers alike due to issues related to the pandemic, such as shifting deadlines, work compression, tax law changes, the accelerated move to digital/remote tax preparation, and much more.

As a result, many tax returns are now being filed on extension. There are many reasons why a tax return may be filed on extension, and most taxpayers are not familiar with the process. In 2021, Forbes reported that 16 million tax returns would be extended, and this number may very well increase this year. Filing an extension allows for up to six months to file a return. This time may be invaluable as taxpayers evaluate their strategic tax options. In addition, filing on extension allows for additional time to compile and analyze information, rather than rushing to file a return that may be incomplete.

Key considerations

• Any past stigma about extensions has evaporated – extensions are not inherently bad and may be more palatable to taxpayers.
• The ‘Great Resignation’ has hit the accounting profession, resulting in an increased reliance on extensions to balance workflow with more urgent client needs.
• Extending a tax return allows for a more complete and accurate return, rather than rushing for the sake of meeting the April deadline.
• Extensions have increased during the pandemic. This is a trend that may become more normalized, particularly with complicated tax filings.
• An extension is not a “red flag” and does not make a taxpayer any more or less likely to face an IRS audit.

Extensions do not serve as payment forgiveness
One very important thing to note is that filing an extension does not provide safe harbor to taxpayers – they must submit an estimated payment or face fines and penalties – as the IRS makes clear on its website:

For most individual taxpayers the tax filing and payment deadline is Monday, April 18, 2022. Those who need more time to file can request an extension to file. Taxpayers must request an extension to file by April 18, or they may face a failure to file penalty. This extension gives them until October 17 to file their tax return. An extension to file is not an extension to pay.

Most taxpayers must pay taxes by April 18 to avoid penalties and interest on the amount owed after that date. Taxpayers in Maine and Massachusetts have until April 19 to pay to file their returns due to the Patriots' Day holiday in those states.

Conversely, taxpayers who have overpaid taxes during the tax year will not be eligible to receive the refund until the tax filing is complete.

Taxpayers should be aware of the benefits of extending their returns in situations where information is not available in a timely manner or the tax circumstances are complicated. There is little to no downside to filing an extension, but taxpayers need to be aware that an extension does not excuse or delay tax obligations. An extension is another tool to be considered as part of the tax planning and filing process.

If you need additional guidance, please reach out to your Herbein team member at info@herbein.com.