When to Extend

As the tax filing deadlines approach, I get calls from clients wanting me to file an extension for them. It’s easy to do electronically; set up a file and send. I don’t need signatures. What I do need is to know about what the client is going to owe so that they can pre-pay that.

The IRS gives individuals an automatic 6 months to file a return. The due date for 2011 tax returns is October 15, 2012 Of course; you can always file the return before that. BUT! An extension is not a delay in paying. It just means you want more time to get all your info together to file a complete return. If you know you will be getting refunds, you really don’t have to file an extension. The extension gives you protection against the failure to file penalty if you make a good faith effort to pay what you think you will owe. Underestimate your final tax and balance due too much and the IRS says they could add the failure to file penalty back. But if you send them too much now, you will get that back as a refund when you do file.

I just said that if you are getting a refund, you don’t need to file an extension but you should if you want to protect the right to elect a special tax treatment. Many elections must be filed with a timely filed tax return and that could include extended returns. For example, a net operating loss is generally carried back to prior years (the number depends on the IRC at that time). But you can elect to just carry the loss forward. But the statement must be filed with the return by April 15^th (17^th this year) unless you file an extension on time. Then you keep the option available until the return is filed or October 15th.

What to do? If your return is done and you just can’t pay the balance due, file the return. You can work out a payment arrangement. If you need more time to get all your paperwork together, estimate your taxes. If you’re sure you’re getting a refund, you don’t need an extension unless you want to protect a special election. File an extension if you owe (or as a protection if the estimate is close) and send them what you think you will owe. You can always file the extension but not pay anything but you have to be prepared for a notice wanting interest and penalties for not pre-paying your tax.

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