How & When to File a Tax Extension for your 2021 Tax Return

While the IRS may currently be battling a backlog of 20 million unprocessed returns, filing deadlines for the 2021 tax year are still rapidly approaching. With all the recent tax changes, you may be considering whether or not to file for an extension for your individual or business tax return. It’s important to understand the implications, requirements, and limitations for tax extensions and how to work with your team or your CPA to meet tax extension deadlines.  

THE PROS AND CONS OF FILING FOR TAX EXTENSION 

First and foremost, it’s important to clarify that filing an extension with the IRS only extends the due date for submitting the actual return; it does not extend the due date for the payment of taxes owed. An estimated amount of taxes due must still be paid by the original filing due date to avoid penalties and interest, which can add up quickly.

Although it doesn’t buy more time for the payment of taxes due, there are still benefits to having the extra time to prepare your return. Filing for an IRS tax deadline extension can be a valuable tool to ensure your return is completed as thoroughly and favorably as possible. Oftentimes items such as Schedule K-1s from outside sources, R&D Tax Credit studies, cost segregation studies, etc., may not be available by the standard deadline but are necessary to support claiming certain credits, taking advantage of exemptions, and other tax benefits. 

Another advantage of a tax return extension is that it can provide your CPA ample time during the quieter months to work on complicated returns and comprehensively assess all potential opportunities for minimizing your tax burden.  For these reasons and more, we file extensions for approximately 70% of our clients on an average year.

On the other hand, those looking to collect their refund quickly would not benefit from filing for an extension as it will delay receipt of the refund owed. There can also be other, nuanced scenarios where your CPA may recommend filing by the original due date. For example, in the case of a late election of S-Corporation status under Rev Proc 2013-30, we recommend filing on time since the company is not yet in the IRS system as an S-Corporation and would require a paper-filed submission for extension of filing, which can cause delays and even get lost in the IRS backlog. 

WHEN TO FILE AN EXTENSION

The deadline for filing a tax extension for 2021 and paying estimated taxes is the original filing due date. (See chart below for this year’s due dates by entity type.) The full, completed return must then be filed by the extended filing due date, six months later.   

*April 19 for MA & ME residents due to Patriots Day Holiday

PAYMENTS & PENALTIES

Even if you are filing for a 2021 tax extension, you will still need to estimate your tax owed and pay as much as possible by the original filing deadline, as there will be penalties and interest for the time period between the original due date and the actual date the tax is paid. (Keep in mind that 2022 Q1 quarterly estimated tax payments will also be due on the same date!) 

• If you do not pay the full amount owed, the IRS will charge interest on the unpaid balance until it is paid in full.
• If you do not file an extension (or the full return) by the due date, you are subject to a penalty for late filing.  The penalty is usually 5% of the amount owed for each month, up to a maximum of 25%.
• If you do not pay at least 90% of the amount owed, you may be subject to a late payment penalty which is usually half of 1% of the amount owed for each month, up to a maximum of 25%.

HOW TO FILE A TAX EXTENSION 

The form for filing a tax extension (Form 4868 for individuals or Form 7004 for business) must be submitted by the original filing deadline for the corresponding entity type in order to take advantage of the additional six months to complete the preparation of your return. You will also need to calculate the estimated amount of tax due and remit payment with the extension in order to avoid/limit penalties and interest.

Keep in mind that while some states accept the federal extension, others require their own extension filing so there may be additional forms required for your state return. 

If you are planning to request your CPA file an extension for you, you will need to provide:

• standard 2021 tax documents distributed in January/February (W-2s, 1099-Rs, etc.) 
• a high-level estimate of business/investment income for 2021
• any quarterly tax payments made for 2021

AUTOMATIC TAX EXTENSIONS

There are two scenarios where the IRS will automatically grant extensions for 2021 tax filing; however, it is recommended to check with your CPA to review your eligibility and confirm whether or not a form for filing a tax extension is required.   

1. Those serving in a combat zone: [1] 

   Automatic 180-day extension: In general, the deadline for performing certain actions applicable to taxes is extended for the period of service in the combat zone, plus 180 days after the last day in the combat zone. You will qualify if either of the following statements is true:

• You serve in the Armed Forces in a combat zone or you have qualifying service outside of a combat zone.
• You serve in the Armed Forces on deployment outside the United States away from your permanent duty station while participating in a contingency operation.

1. Citizens or Resident Aliens living outside the United States: [2] 

   Automatic 2-month extension: You are allowed an automatic 2-month extension to file your return and pay federal income tax if you are a U.S. citizen or resident alien, and on the regular due date of your return:

• You are living outside the United States and Puerto Rico, and your main place of business or post of duty is outside the United States and Puerto Rico, or
• You are in military or naval service on duty outside the United States and Puerto Rico. 

  Automatic 6-month extension: If you are not able to file your return by the due date, you can generally get an automatic 6-month extension of time to file (but not of time to pay). To get this automatic extension, you must file a paper Form 4868 or use IRS e-file (electronic filing).

Whether you are considering an extension for tax filing for 2021 or looking to file your complete return, the deadline is right around the corner! Are you ready? Reach out to us today.