However, filing an extension doesn't mean you don't have to pay anything until October. A tax extension gives you more time to file, but not more time to pay. Every U.S. citizen must pay their tax liability by the April deadline, regardless of whether they request an extension.
For many Americans, waiting until October to file is often necessary to ensure the accuracy of their returns. If someone is involved in 150 partnerships, for example, the odds of all 150 of those partnerships having their documents in order by April are slim to none. In those cases, tax advisors use the data they have in order to make a best-guess estimate of an individual's tax liability. As the year goes on, the information needed to file begins to trickle in as the client's partnerships and investment entities file their tax returns.
Additionally, certain elections must be designated on a timely filed tax return.
For example, individuals with foreign investments need to make certain elections regarding the recognition of income on their tax returns, which must be made on a timely filed return. This often means they cannot file in April, because they simply don't have the data they need in order to make a timely election.
More from FA Playbook:
Why retiree tax rates may be higher than expected
This tax strategy's a win for couples nearing retirement
Use this charitable contribution for tax benefits now
Individuals who are self-employed and have a set retirement plan could also request an extension if they are unable to make the required annual contribution before April. If they don't have the money they need in April, but know they can get it together within the next six months, it makes sense to go on extension so they can have time to make that plan contribution and get the deduction for the prior year.
Many people assume that requesting an extension on their taxes will put them at a greater risk for an audit, but that is simply not true. The fact of the matter is that the more complex your return, the more likely you are to be audited. As more complicated returns typically require an extension to be filed accurately, there may be a perceived correlation between extended filing and auditing. But correlation does not equal causation in this case.
There are, however, penalties and allowances for extensions. If you don't pay a certain percentage of your tax in April, or if the estimate you claim on your extension request form is not an honest amount, your extension could be disqualified. When this happens, you will be required to pay interest on any unpaid taxes from April onwards, as you are technically filing late.
If you have filed an extension on your taxes, chances are you are not the one preparing them. These complex returns are best handled by a tax professional, who can maximize your deductions and track down obscure tax forms you probably don't know about.