16 tips about filing for an extension past Tax Day

March 5, 2024 8:00 AM

When the certified public accountant and certified financial planner Jack Oujo's grandfather died one Tax Day, the rest of his family didn't tell him because they thought he was too busy, he said.

"I was the only grandchild who wasn't told about it," said Oujo, the founder of Wall, New Jersey-based Oujo Wealth Strategies. "I was home watching TV. Most efficient CPA firms will have their ducks in a row long before April 15. I would never allow a client to push me around and give me a pile of information on April 14 and have it done the next day. That's just not happening."

For financial advisors and tax professionals, Tax Day gets too much hype among clients in terms of the actual date in April. They contend that there is, conversely, too little around the ease of getting an extension from the IRS while waiting on certain forms, getting more time for business owners' retirement contributions and just ensuring everything is correct.

And one thing no one should ever mix up: the tax filing may be pushed back, but never the payment. Through interviews with Oujo and a half dozen other advisors with tax expertise, Financial Planning compiled the below list of tips on the key factors determining when taxpayers should fill out IRS Form 4868 and the psychology involved with clients' fixation on April 15.

For instance, some believe in a "misconception in the public that requesting an extension increases the audit risk," according to Liting Chuang, a CPA and CFP who's the director of tax planning for Menlo Park, California-based Bordeaux Wealth Advisors. She counts herself as "a big proponent of everyone filing an extension" when there's a rationale, she said in an interview.

"Haste makes waste," Chuang said. "When you rush through, it's just going to end up costing more time and money down the road having to return amended forms."

In putting together this guide to pushing back the filing deadline until Oct. 15 (or the next business day in years in which that date falls on a weekend), FP also spoke with the following advisors:

Jerel Butler, a CFP who's a financial planner with Philadelphia-based Zenith Wealth Partners
Rupa Pereira, an enrolled agent and accredited investment fiduciary who's the principal of Apex, North Carolina-based FWJ Planning
Amy Irvine, a CFP and EA who's principal owner of New York-based Rooted Planning Group
Valerie Escobar, a CFP who's a senior wealth advisor with Overland Park, Kansas-based Mariner Wealth Advisors
Andrew Altfest, a CFP who's president of New York-based Altfest Personal Wealth Management and founder of FP Alpha

Regardless of the best professional strategies to employ in advance of Tax Day and avoiding the obsession with one particular date, clients will likely always circle the day on the calendar. At an average of 22,000 searches every month, "When is Tax Day?" is the most heavily-queried tax phrase, according to a report earlier this year by CPA firm Greenback Expat Tax Services. In the No. 3 position on the list, "How to file tax extension," gets 17,000 searches a month.

Leaders

Tax planning for financial advisors before April 15

For 16 tips on filing for an extension, scroll down the slideshow below. For a larger look at what's driving the growing ties between wealth management and tax services, see "Taxes + wealth: 2 connected but still (for now) distinct fields are merging." And, to get the 23 biggest tax stories of the year from 2023, click here.

Plan ahead

Taxpayers need not stress about requesting the extension, if their advisor helps ensure "a smooth extension process" by raising the topic in January or February, Butler said in an email.

"Extensions are fairly easy to execute," he said. "The main hurdle normally is when initial communication with the client occurs. … When pushing up against the March 15 [the due date for S-corporations or partnerships to file the prior year's business taxes] or April 15 extension deadlines, sometimes it can be a challenge if no prior communication happens before those dates."

Steer clear of costly mistakes

Errors for filing by Tax Day cost more in the end, Escobar noted in an email.

"We want to make sure a client's tax return is correct the first time," she said. "Amending a return can be expensive and may result in penalties for underpayment if the amendment results in a larger tax liability."

Beat the rat race

Taxpayers preparing far in advance of Tax Day can reap big advantages with a filing extension, Pereira said in an email.

"To avoid the rush of April 15 deadline, get all necessary tax documents in order and work closely with [your] tax professional on doing it right [the] first time," she said, noting that those timely filings of Form 4868 could also help "avoid future IRS audits, especially if it's a higher-income earner" along with "higher business deductions, higher S-corporation distributions or foreign-income reporting."

Behavioral finance

The attachment to Tax Day is "a psychological thing more than anything," according to Altfest, who said in an interview that many clients view the filing extension as similar to asking a teacher to push back the due date on a paper and expecting a lower grade as a result.

"They literally feel that they're doing something wrong, that they didn't hit their deadline. It's like being a student again," he said. "Some of them who are not used to doing it say, 'I just want to get it done on April 15.' Some people don't want to invest in private investments just because they want to get their taxes done on April 15. It's mostly psychological when people don't want to do it."

Get over it

In Oujo's office, the tax staff goes home at noon each year on April 15 after assisting the firm's clients in getting their filings completed well before then, he said.

"This whole bit about April 15 where everyone loses their mind over it — it's kind of stupid," Oujo said. "If you're not ready, send in an extension, send in the check. All you've got to do is send in that Form 4868 and you're done."

No reason to wait on a later deadline, either

Tax professionals and their clients should get ready mentally for the different timeline, Irvine said in an email.

"When we file an extension, it doesn't mean the taxes owed are extended, so we still have to have some of the data in order to file," she said. "The return sits in limbo for several months until we get the data, then we have to basically start over mentally. When we file extensions, we try to get the return done by the end of May, if possible, so that tax season doesn't linger into October."

The reason to get them in by Tax Day

Those anticipating a check from the IRS will want to file by the standard deadline, according to Chuang.

"The only situation where you want to file by April 15 is when your tax return is relatively easy and you're getting a refund," she said. "Then obviously you would want to file as soon as possible."

Retirement plans

Contributions into retirement savings plans for self-employed taxpayers and other small business owners comprise one of the most popular reasons for extensions, Butler noted.

"Retirement contribution deadlines for the previous tax year can be theoretically extended to the tax filing deadline," he said. "So if you request a six-month filing extension, you have more time to contribute to a retirement account. Therefore, this tends to be a great reason to file an extension."

One of Altfest's clients will use the later deadline this year for that purpose, he said.

"They get more time to put money into their plan and manage their cash flow if they file an extension," Altfest said. "He's been borrowing money to put money into his retirement plan."

At least get a reprieve from late filing penalties

For self-employed clients who are so "cash-strapped in April" that they can't pay the balance due that month, an extension ensures they won't have to pay a late filing penalty on top of the interest and a fine for failing to pay, Chuang noted. They can reap other advantages from the later date as well.

"They have until Oct. 15 to fund their solo 401(k) or SEP IRA [simplified employee pension individual retirement account]," she said. "If they extend their return, then they can delay funding of their retirement account."

Schedule K-1 delay

Pass-through entity owners must wait until the March 15 deadline or later in some cases to get the necessary details for their tax filings through the IRS Schedule K-1 form with data about their partnership or S-corporation, Oujo noted.

"You can't do your own return until you have that information," he said.

Irvine's clients typically request extensions in a couple of different cases, she said.

"One situation is when a client can take advantage of a SEP or 401(k) contribution but doesn't have the cash readily available. They can save up for the contribution, which will lower their taxes ultimately," she said. "When they are receiving documents like K-1's, they often don't get them until April, which doesn't give them time to file or they are rushing and errors are made."

Clients investing in private instruments and other more complex vehicles than those in a standard portfolio often benefit from the extensions, Altfest noted.

"Those K-1's often come after April 15. For people who do invest in alternatives, it's not unusual to see them request an extension while they're waiting for the K-1's to come in," he said. "The more complicated a situation, the more time they have to actually gather information and make sure the tax return is correct."

Evade K-1 frustrations

The K-1s themselves may even have errors affecting the returns of those investing in private placements and other alternative vehicles, Escobar said.

"The company issuing the K-1 has a deadline of March 15, but they are also able to request an extension to Sept. 15," she said. "Additionally, many K-1s need to be amended, so getting an amended K-1 after you've filed may lead to banging of one's head on the wall as the realization of needing to amend your return sinks in."

Waiting on another form

Even though the many kinds of Form 1099 are "typically issued around the middle of February to end of February," they may sometimes come after April 15 or need amendments as well, Chuang noted. For example, mutual funds may have reclassified their dividends or a brokerage may send a corrected 1099 relating to a clients' investments.

"Sometimes these adjustments on a 1099 could be extensive," she said.

For complicated filings

Advisors and tax professionals working with business owners have likely grown familiar with the extension process, according to Butler.

"Business owners are usually the most likely candidates who would require an extension because of the complex pieces surrounding closing of accounting books, fiscal years, retirement contributions, etc. More time is needed to accurately depict what levers can be pulled to delay or defer taxes," he said.

Adjusted gross income impact

Pereira's clients display some other situations that often merit delayed tax filing, she noted.

"With student loans payments resuming, some taxpayers on income-based repayment plans may be better off delaying tax filing to keep their payments to pre-COVID [adjusted gross income] levels," Pereira said. "U.S. residents traveling overseas for work/leisure or other reasons can also benefit from an extension."

Data challenges

Asked about the main challenges when requesting an extension, Escobar said that "getting preliminary data for calculating estimated payments" often poses problems.

"Although the return can be extended, the payments cannot," she said. "The IRS does not have much pity for payments calculated on incomplete data."

Don’t get hit with penalties

Even if clients aren't sure whether they'll owe money once everything is added up by the extended deadline, they should still send in a payment, according to Oujo. That could count as credit toward what they owe in the following year.

"It's not an extension of time to pay. It's an extension of time to file," he said. "If you file an extension and you still owe money, you're still going to be penalized. If you owe money and you don't pay by April 15, you're going to pay some interest."

The taxpayers can easily get the extension by simply filing Form 4868 online and submitting it to the IRS, Pereira noted.

"It's not that challenging," she said. "This is, however, only an extension to filing the return, not an extension to pay. If payment is due, and if they pay by the due date, they automatically receive a six-month filing extension."

The extension just requires taxpayers to state their estimated liability, how much they paid and send in any outstanding taxes due, Chuang noted.

"There are three numbers you need on that form, so it's a very easy process," she said. "Out of all the tax forms, the extension form is the easiest."