Taxpayers that requested a six-month extension to their filing deadline are fast approaching Tax Day. Those who applied and were granted the extension are expected to file with the Internal Revenue Service (IRS) by October 15.
Who applies for an extension on tax returns? This group often includes those who have complicated returns. Examples include foreign investments, the self-employed and those transitioning into retirement.
What are some risks that come with an extension? Whatever the reason for the extension, every taxpayer can face two common issues when taking advantage of the pushed back deadline. These issues include:
- Penalties. An extension on Tax Day does not translate to a six-month grace period. The IRS still expected these taxpayers to pay their tax liability at the April deadline. In most cases, these individuals pay their best estimated tax obligation in April and work to get all their taxes in line and verify this amount by the October extension date.
- Paperwork. As noted in a recent publication by CNBC, the key to the extension is paperwork. These individuals often have multiple investments. Getting all the paperwork in order prior to the April deadline can be difficult to impossible. That is when the extension comes into play. This allows high-net worth taxpayer to get all the documents they need to support their claimed tax obligation in a more reasonable period of time.
It is important to note the risks that come with a failure to extend can be far more serious. Most notable would be filing tax returns without all the needed paperwork.
Ideally, an experienced tax professional will discuss these issues prior to filing for the tax deadline extension. Proper preparation can mitigate the risk of penalties and additional issues when taking the extension.