To extend or not to extend that is the question.
Business Taxpayers often worry that extending their tax returns will send a red flag to the IRS.
An additional 6 months to file is automatically granted to businesses with the filing of Form 7004 - Application for Automatic Extension of Time To File Certain
Business Income Tax, Information, and Other Returns
The extension is automatically granted upon filing the Form. Meaning, there doesn't need to be a specific reason to extend.
PROs
- The extension provides 6 additional months to file.
- Taxpayer may file a superseding return (rather than having to amend) within the extended filing deadline. A superseding return is similar to an amended return, except it takes the place of the originally filed return, rather than having to formally submit an amended tax return.
- An extension payment can be used to satisfy the previous years tax liability and then carried forward as a first quarter payment for the current year.
- More time can be used to clean up the accounting records, analyze accounts, and prepare a tax return that is audit ready, instead of rush because of a soft deadline.
- It is necessary due to missing tax return information like a Schedule K-1 from an investment.
CONs
- It doesn't extend the time to pay. Taxpayers are generally required to make estimated tax payments during the year.
- The statute of limitations is extended as the filing of the return is extended. Meaning the return is potentially subject to audit for a longer period of time as the statute of limitations doesn't start until the return is filed and/or tax is paid, whichever is later. The statute of limitations is 3 years for Federal income tax returns if filed in good faith.
As a best practice, we recommend extending even in the event that the business still intends to file by the original due date. The extension payments should be equal or close to the return liability and can be paid prior to the filing of the returns. This eliminates the due date rush of scheduling payments. It gives the business the option to wait and file, for example, if there are pending tax court cases of interest or if the books and records are still in process.
