Yo what's going everybody? My name is Ryan, I'm a CPA, and today I'm going to be talking about
why you shouldn't file for a tax extension. Now I know there's definitely a lot of legitimate
reasons to file for an extension but I'm going to tell you some downsides today that hopefully, will
maybe keep you more informed and maybe change your mind in the future. But either way,
it's important to know that an extension is not just a free six months for you to do whatever
you want because there are you know, downsides associated with it if you owe taxes. So here we
go. So what is a tax extension? As you know tax returns for individuals are due on April 15th or
somewhere around there if the 15th falls on a weekend. And for partnerships and corporations
they are due on March 15th. So an extension basically gives you an additional six months to
file your tax return. That means for individuals the extension deadline is October 15th and for
partnerships and corporations that is September 15th. With that being said it gives you extra time
to file right? But what confuses a lot of people is that it doesn't give you extra time to pay your
taxes. So basically if you file for an extension for your personal return and you owe taxes,
the taxes are still due on April 15th even though you have until October 15th to file your return.
Now you might be thinking that doesn't make any sense, it's kind of stupid. Like how are you
supposed to know how much you owe without first preparing your taxes and then filing them? Well
that's kind of the challenge that we run into as professional tax preparers is you know,
we will get clients late March, early April and there is no chance we can finish their
return by April 15th. Because you know, we, we do a lot of taxes so our backlog is huge.
So we've got to try to make sure our clients understand, hey if we're going to engage you
at this time we can't file your return by the 15th. And if you think you're going to owe taxes
then we can't really figure out how much you're going to owe until we actually you know, start
working on your tax return. So you know obviously, there's a discrepancy there. You might owe taxes,
you might not, but you're unsure. So you might have to pay something by April 15th, you might
not. Like how do you know what you should pay? Well that's that's part of the challenge here
okay. That's why, that's one of the reasons why I encourage people to file their taxes on time
rather than filing for an extension and playing this guessing game. So if you don't pay your
taxes by April 15th you are subject to penalties and interest on the unpaid amount of your taxes.
So you know, that's why we encourage like paying quarterly estimated payments
that would minimize, you know it will definitely help with the,
with any penalties and interest if you don't pay your taxes by April 15th. Or you know, if you have
a good guess on how much you might owe, you know you can just pay that to the IRS and to the state
to kind of mitigate the penalties and interest as much as you can. The penalties for not paying
taxes on time by April 15th is half a percent, per month of your unpaid amount okay. So you know that
annualizes to basically six percent per year. Now, you also have to pay interest on the unpaid amount
and currently the interest rate is six percent per year. So that's also half percent per month
and the interest rate changes every quarter, the IRS updates every quarter. But right now it's
six percent per year. So if you combine those two things, the penalty and the interest you're
basically paying a 12% annual fee for any unpaid taxes if you didn't pay them by April 15th. That
doesn't mean your extension is useless because you know, if you needed extra time to file your taxes
that's good because the penalties for not filing your taxes on time. Keep in mind there's a
difference between filing and paying your taxes. The penalty for not filing your taxes on time is
a whopping five percent per month, which is pretty significant and that's five percent of
your unpaid taxes okay. So with both the failure to file penalty and the failure to pay penalty,
both of those penalties are limited to 25% of your total unpaid taxes. So once it gets to that point,
it's going to stop accruing penalties. But keep in mind interest will still accrue indefinitely.
This means that there are people out there who say, oh I just filed an extension because
I don't want, I know I'm going to owe and I don't want to pay them until October.
Well as you can see now it doesn't work like that. If you don't want to pay them until October,
you're actually screwing yourself because you're accruing additional interest and penalties. Now if
you are due a refund and you file an extension, you didn't pay anything, and you're due refunds
then you don't owe any penalties because you know, as I mentioned the failure to file and the failure
to pay penalty are imposed on your unpaid taxes due. So if you're due any refunds, you already
paid all your taxes that you're owed, and they, and then the IRS actually owes you money. So
whether or not you file late, if you're due refunds you don't owe any penalties. If you're in
a situation where you needed to file an extension what should you do? Okay so obviously, there's
times where people own like a small minority ownership of a business that requires a K1,
and those businesses usually file extensions, and so the the ownership won't get their K1s
until September. Or sometimes you're waiting for corrected tax forms, or you're just
missing information that you need to retrieve before you can even start to file your taxes,
so you legitimately need an extension, what should you do? So you know my recommendation is
if you have any inkling that you were going to owe any taxes you should pay something at the time,
you know by April 15th. Because what that does is if you pay, you know let's say April 15th comes,
you send them $5,000 with your extension okay, and then in July you finish your tax return and you
see that you owe them $7,000 not not including the $5,000 you sent in April. So now instead of being
penalized and charged interest on $7,000, you're only going to be penalized and paying interest on
$2,000 since you paid them $5,000 already okay. So your penalties and interest will be a lot lower.
So that's a good thing. The other thing too if you pay them too much in April and you get a refund,
I mean that's probably like the best, one of the best outcomes in this scenario, because
then you're not going to owe any penalties and interest all right. Now there are people who say
you know, if you, if you get a refund when you do your taxes then you basically get,
gave the government an interest-free loan for the entire year. And you know, while that's true
for like normal folks who file their taxes on time and get refunds every year and all that,
that's just simply not the case in this situation because you're not giving the
government an interest-free loan. You are saving yourself 12% of fees
for filing extension. So yeah my recommendation is if you think you're going to owe anything,
or come close to owing, maybe you might get a refund, you might owe, I would just pay like a
guess what you think you would owe. I you know, I know this is not,
not the best gauge here but you know, you really know your financial situation better than any tax
professional or tax preparer who hasn't even looked at your your documents yet. So
you know, I would recommend you pay something okay, because the worst case scenario
you minimize your entry, your interest and penalties, and best case scenario you pay
too much and you got a refund. Ideally obviously, ideally you would file your taxes on time you get
all your documents you need, you know if you work with a CPA or any tax professional, ideally you
get with them in February, or maybe early March at the latest to make sure you give them enough time
to run through your tax return. And yeah, that's best case scenario but obviously, like I said if
you have legitimate reasons to file an extension that you absolutely have to, then you should pay
them something if you think you're going to owe. That's all I've got for today. Thanks for joining
me. If you are new here, thanks for watching. Please consider subscribing to my channel as we're
continuing to put out helpful content. And obviously, if you think this video was helpful
please smash the like button. I would really appreciate that. And share with your friends
and family, whoever you think may find it helpful. Alright take care for now. I'll see you next week.