Following are 20 reasons for obtaining an extension. The extension must be filed by this year’s due date of April 18. Further, the extension covers filing, not paying the tax which must be paid by April 18 or penalties will be assessed and the extension can possibly be disallowed.
- You did not receive some K-1s or 1099s or other documents with information that you need to report
- You did not receive letters confirming charitable contributions that are required to be in your possession by the due date (including extensions) of your tax return. This includes certified appraisals for contributions of property over $5,000.
- You have pending litigation or a tax audit and reporting certain transactions might prejudice your position or you are awaiting resolution which might affect an item on this year’s return
- You are involved in a marital separation, litigation or are a candidate for a public position that requires tax return disclosure and you want to delay this as long as possible
- You might want to reverse a 2016 IRA conversion to a Roth IRA and would rather not file by April 18 so an amended return would not be necessary if you decide to reverse the conversion by October 16, 2017
- Circumstances may have prohibited you from assembling all your information properly. This might include a medical emergency or searching for tax basis of securities or assets that have been sold, or being on jury duty for a protracted period
- If your tax preparer is unable to devote the necessary time to get the return ready to file on time
- You have a complicated situation and you feel it is best to have an extension so the preparer would have more time under less rushed conditions to devote to your return
- You might want to open and/or fund a SEP pension plan. By extending, you will have until October 17 to make your decision. If you have a Keogh, 401k or SIMPLE plan, the contribution for last year can be made by the extended due date, but the Keogh and 401k must have been established by the previous December 31 and the SIMPLE by September 30, 2015 (crazy and inconsistent rules for basically the same type of deductions)
- You did not file last year’s return and feel that filing this year’s return before the prior year will cause extra IRS attention to you. However, irrespective of what you did not file, you should file this year’s return on time which would include the extended due date. Note: I wrote about how to handle missed tax filings on Feb 20, 2012 and you can retrieve this in this blog’s archives
- Those with a 2016 installment sale might want to wait as long as possible in 2017 to consider electing out of the installment sale if your 2016 taxable income is substantially lower than what is expected for 2017 or later years
- People with net operating or other losses that can be carried back might want to delay filing to determine if they should elect to forego that and carry it forward
- The extension can delay elections that are made on the first-filed tax return reporting certain new transactions
- The extension is for a gift tax return where not all the issues are clear including generation skipping elections and spousal consents, or where basis information is not readily available or valuations are not completed
- There is a high risk of audit – filing an extension might reduce the chance of an audit. Note that it will not lower the chance of a computer-generated notice questioning an item or picking up income that was not reported
- An error is discovered on a prior year’s return and additional time is needed to research and correct it, and the current year’s return might be affected by the change
- You will be out of the country during the filing period. Note: If you are a U.S. citizen or resident and qualify under special rules for being out of the country on April 18, 2017 you will have an automatic two-month extension to file and make any payments and do not have to file for the extension. If you need additional time after that date, then you will need to file for an additional four-month extension. If you are abroad and want the extension because you expect to qualify for special tax treatment you should file Form 2350
- You did not receive a W-2 wage statement from an employer. This can be a problem, but the IRS has Form 4852 Substitute for Form W-2 to recreate your version of your W-2
- A suggestion to avoid filing an extension when you did not receive a K-1 that will report an insignificant amount is to estimate the amount and file on time. When you file next year’s return adjust the amount for the difference in what you reported and the actual K-1 amount. If the amount is substantial I suggest waiting for the final K-1 and filing the extension
- You ran out of time to get the return done
A tip for those filing extensions that also should pay estimated tax is to include the first quarter estimated payment with the extension payment. In case you underestimated your 2016 tax for the extension, the added first quarter payment would reduce that penalty which is greater than the penalty for the underestimated 2017 tax. Also, do not forget to file state and local extensions if applicable, and pay the tax you anticipate owing.
Those that want to file for an extension can easily do it using IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) which can be downloaded at https://www.irs.gov/pub/irs-pdf/f4868.pdf. Search your state’s and locality’s websites for their extension forms.
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Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. As a trusted senior advisor and counselor working closely with Entrepreneurs, Professionals and Select Individuals, Mr. Hoffman provides counsel to his clients who are navigating through the complexity of today's business, tax, and accounting challenges.
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