[IMGCAP(1)]Those who know me, know that I do not like extensions. However, there are valid reasons for extensions, and here are 15 of them:
1. You did not receive K-1s or 1099s or other documents with information that you need to report.
2. You did not receive letters confirming charitable contributions that are required to be in your possession by the due date of your tax return.
3. There is pending litigation and reporting certain transactions might prejudice your position -- or you are awaiting resolution which might cause or affect an adjustment or estimate made for last year.
4. You might want to reverse a 2012 IRA conversion to a Roth IRA and would rather not file by April 15 so an amended return would not be necessary if you decide to reverse the conversion by Oct. 15, 2013.
5. Circumstances may have prohibited you from assembling all your information properly. This might also include searching for tax basis of securities or assets that have been sold.
6. You have some complicated situations and you and your tax preparer feel it is best to have an extension so the preparer will have more, and less rushed, time to devote to your return.
7. You might want to open and/or fund a SEP pension plan. By extending, you will have until October 15 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 Sept. 30, 2012 (crazy and inconsistent rules for basically the same type of deductions).
8. 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 be the extended due date.
9. Those with a 2012 installment sale might want to wait as long as possible in 2013 to elect out of the installment sale. They would want the time to see if they get paid and to better assess the likelihood of receipt of the remainder. The 2012 capital gains rates are much lower than 2013 and later years. Alternatively, those with 2012 installment sale gains that can be carried over to 2013 might want to keep the installment sale if they expect to have 2013 short- or long-term capital losses that can shelter these gains.
10. People with losses that can be carried back might want to delay filing to determine if they should elect to forego that and carry it forward.
11. The extension can delay elections that are made on the first-filed tax return reporting certain transactions.
12. The extension is for a gift tax return where not all the issues are clear … including generation-skipping elections and spousal consents, the basis information is not readily available or discount valuations are not completed.
13. 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.
14. If the tax preparer is unable to devote the necessary time to get the return ready to file on time.
15. An error is discovered on a prior year return and additional time is needed to research and correct it, and the current year’s return might be affected by the change.
Remember, the extension is to delay the filing, not the payment. Payments must be timely made. A tip for those filing extensions who would also have to pay estimated tax is to include the first-quarter estimated payment with the extension payment. In the case where you underestimated your 2012 tax, the added first-quarter payment would reduce that penalty which is greater than the penalty for the underestimated 2013 tax.
Ed Mendlowitz, CPA, ABV, CFF, PFS, is a partner at Top 100 Firm WithumSmith+Brown. He blogs regularly at The Partners’ Network, and has written 19 books.