“Never” file your income tax return

(without first filing for an extension)

Why would anyone who knows all the facts ever want to file their individual income tax return (Form 1040) before April 15th?  or their business tax return (usually Form 1065) before March 15th? (April 15th for years before 2017). There are no “good” reasons, really. Filing an extension gives the taxpayer time to review, time to think over tax positions, and time for him and his tax preparer to go though the work without being rushed and possibly being more distracted than would be the case a couple months later.

Treasury Regulation §1.6081-4(c) says: “No extension of time for the payment of tax. An automatic extension of time for filing a return granted under paragraph (a) of this section will not extend the time for payment of any tax due on such return.”  While in the past the non-payment of tax by April 15th was cause for termination of the filing extension, that is no longer the case.   In fact, filing Form 4868 to get an extension to file your Form 1040 does not require the payment of tax, since that rule was eliminated in 1993.  Any underpayment will be subject to interest and can also be subject to a late payment penalty as well.

re: Forms 1040/4868 you must properly estimate your tax liability using the information available to you and enter that amount on line 4 of Form 4868.  You are not required to make a payment of the tax you estimate as being due. If you don’t pay the amount due by the regular due date, you’ll owe interest. You may also be charged penalties. You don’t have to explain why you’re asking for the extension, since that Form 2688 rule was eliminated in 2005.

Of course, as with anything else, there are pros and cons: First, the reasons to file ASAP:

  • Some people dislike taxes so much that they just want to get it out of the way. They do not want to consider any more tax planning than is absolutely necessary or think about any optional strategies that could be handled better after the April “rush.”
  • If the taxpayer was unable to plan properly, for example if there was an unexpected drop in taxable income, and therefore a sizeable refund of a resulting income tax overpayment is due.
  • Worse, are taxpayers who look for large refunds year-after-year and then they take a short-term advance called a “refund anticipation loan” (RAL) and pay an exorbitant rate of return to the lender for the privilege of getting their own overpaid money back.
  • The taxpayer is ill and might be unable to file the tax return later on in the year due to his death or other grave situation.
  • The statute of limitations expiration date (ASED) ends sooner for the period of time that the IRS has to assess additional tax (i.e. three years from April 15th)
  • Taxpayer might have a large Net Operating Loss (NOL) and the sooner the tax return is filed, the sooner the NOL can be carried back.

There are plenty of reasons not to file on March 15th or April 15th

  • Speaking of NOLs – the odds of an IRS inquiry over a complicated tax return and a quick filing of Form 1045 or 1040-X seeking a large refund is far greater so early in the year when the IRS knows that most competent tax advisers are very busy doing a rush of tax work and filing extensions for their clients.

  • Example: in March 2020 Congress passed a retroactive recovery rebate based on the number of dependents claimed on Form 1040 and based on 2020, 2019 or 2018 AGI with a reduction made in the case of a higher AGI.  Those who already rushed to file 2019 were stuck with using 2019’s dependents and AGI, when for some folks a larger recovery rebate would have be paid to them if 2018’s dependents and AGI only were available for the IRS to use.  No clawback of excess payments was allowed , but even if there was a clawback, those taxpayers could have had an interest-free loan from the IRS.

  • The statute of limitations expiration date (RSED) ends later for the period of time that the taxpayer has seek a lower tax or a refund of tax or some other tax benefits (i.e. perhaps three years from October 15th)  Every year CPAs see taxpayer who are rushing to beat the three year deadline for claiming a refund in October, which otherwise would have been too late with the statute running out in the previous April. 

  • For any newly passed annual tax return provisions, the IRS is sometimes still working on fixing some of the bugs until after March or April. Example: For 2011 IRS did not even accept anything but very basic “W-2 & standard deduction” tax returns until half-way through the regular filing season, because they needed to bring their internal systems up to cover a substantial number of last minute changes Congress passed in December 2010. Example: In 2010 a Haiti earthquake relief deduction was retroactively passed into law, necessitating some early-bird taxpayers to file superseding or amended 2009 tax returns. Example: In late 2009 a new home-buyer tax credit was passed allowing it to be claimed retroactively on 2008 tax returns. Example: As late as December 2019 Congress renewed the temporary tax “extenders” provisions that had expired in 2017 and 2018, as well as those that are scheduled to expire at the end of 2019. These renewals are now generally scheduled to continue through 2020. Example: On November 3, 2021, FEMA and IRS retroactively granted extra time for certain taxpayers (including 100% of our tax clients) who had not yet filed certain 2020 and 2021 tax returns and made certain tax payments.  They now had until January 3, 2022 to fulfill their obligations.
  • The IRS makes their audit selections based on numerous scans of the tax return data throughout the year. The sooner a taxpayer’s return is filed, the more scans that will pass through the numbers on that tax return, thereby increasing the exposure for being pulled out for a closer IRS review.

  • When selected for an audit, the IRS will often look at all of the available open tax years that have been filed. If you have already filed the most recent year return, even if it has not yet been processed by the IRS, they can review that year along with the older year that was selected for the examination. But if you are able to tell the IRS agent, “sorry an extension was filed because the tax return is not completed yet” – then the audit can be ended without expanding the examination to include the most recent tax year.

  • When filing on April 15th, by default, the taxpayer makes various irrevocable tax elections. By filing an automatic extension request, the time for making most of these elections is deferred until later. Every year we hear about taxpayers who filed early, only to find that their circumstances have changed after April 15th – but if the tax return was not put on extension, it is too late:
    • ○ such as – married filing a joint return is an irrevocable election. After April 15th this may not (cannot) be changed (or amended) to married filing separate. Too often it is learned only after it is too late that some tax benefit available as a married separate filer has been lost. Had the taxpayers gone on extension, more time would have been available to decide if they wanted to file Jointly or Separately, because the irrevocable election to file jointly would not have been made until after April 15th – not being made until later, when the tax return is filed.
    • ○ example of a taxpayer situation that could have benefited by going on extension; to file after April 15th: On May 8, 2008 the IRS issued Economic Stimulus Payment FAQs: Taxpayer Identification Numbers “I have an ITIN, but my spouse has a valid Social Security number. Can we get a stimulus payment?” “If you and your spouse file a joint return, you will not get a stimulus payment. If your spouse files a separate return, your spouse may qualify for a payment, based on his or her income deductions and credits.”

  • Once a special irrevocable election to carry forward a Net Operating Loss (or to carry it back) is made, it is too late to change your mind later on in the year when subsequent events might favor making the opposite election.

  • Retirement plan contributions must be determined in amount by April 15th and actually paid no later than April 15th unless an extension is filed; in which case both the determination of the amount and the payment are deferred until as late as October 15th
    • ○ IRAs are an exception to this rule, they must be funded by April 15th

  • Changing your mind about the amount already contributed to a retirement plan – for example, due to a turn in the market, a change in your personal finances, or any number of other reasons, generally is allowed without penalty only until April 15th unless an extension is filed.

  • Any extra tax deduction for expenses paid under the 8½ month “recurring item” rule, Regs 1.461-5(b)(1)(i) almost by definition can’t be determined until as late as September 15th

  • Trying to “get it done” April 15th is a disadvantage compared to working on it and thinking it over, strategizing and reworking the numbers as necessary over the summer months.

  • Bank 1099-INT forms and small W-2s sometimes get overlooked or are mis-delivered by the US Mail, only to be located later, during the summer months.

  • Brokerage 1099s are sometimes mailed late or are modified late in March, even sometimes after April 15th

  • Partnership K-1s, s-corp K-1s, LLC K-1s and Fiduciary K-1s are sometimes delayed or show up as a “surprise” later in the year or they are so complicated that it is better to handle them during the slower summer months when they can be reviewed carefully without other distractions.

  • For taxpayers who cannot afford to pay their tax bill when due, the extension request often keeps the IRS at bay, thereby giving the taxpayer more “breathing room.”
    • ○ Note that any taxes due should be paid by April 15th and the first “quarterly installment” for the following year is also due at the time the extension request is made.

    • ○ When there is a possibility that taxes will be due, then the tax return can be roughed-in prior to April in order to determine an appropriate amount to pay with the extension.

    • ○ When filing the extension, it is often a good idea to pay a sufficient amount that will result in an overpayment which in turn will be elected to be applied to the following year. This overpayment then takes care of the first “quarterly installment” for the following year.
      • ◙ This “trick” gives the taxpayer various strategy plays that can be determined after seeing events that occur after April, and before the tax return is filed.

    • ○ This election to apply an overpayment is not always the best idea for anyone who could become a delinquent tax filer. When filing more than three years late, the overpayments often are forfeited without limitation, as a late-filer penalty.

  • The IRS expects to see large and complicated tax returns filed closer to October, when the taxpayer’s CPA has had ample time to review the numbers with the taxpayer and is more likely to file a complete and accurate return. Large or complicated returns filed by April, especially if they are requesting an overpayment to be refunded, makes the IRS suspicious and therefore flags the return for possible review or analysis.
    • ○ As an example of what can happen if suspicions are raised – in 2008 New York governor, Eliot Spitzer was being secretly observed by U.S. Treasury agents after the movement of cash raised suspicions of possible unreported income. This eventually led to an unexpected discovery of an activity that had nothing at all to do with his tax returns, but the investigation resulted in him resigning from office.

  • Brochure explaining going on extension, click here (2 page PDF) to read.

  • KPMG – A Valid Extension of Time to File a Return May Be Your Best Friend

  • Missed the extended due date? Why it can be beneficial to file delinquently (somewhat tongue-in-cheek)
  • The lookback period under IRC section 6511(b) is always lengthened by an extension of time to file. Therefore, it is probably advisable to always request an extension, without exception, even when the taxpayer files by the original due date (or does not file at all). The extended lookback period can still be useful if and when a claim for refund is eventually filed.