The Main Reasons To File A Tax Extension Beyond Late K-1s

The main reasons to file a tax extensionFor the past several years I've filed a tax extension. A tax extension allows taxpayers to file for a six-month extension if they need more time to prepare their tax returns.

The neat thing is that you can obtain an extension for any reason, so long as you submit Form 4868 electronically or on paper by the April filing deadline.

By filing a tax extension, you'll also avoid failure-to-file penalties, which can add up to 25% of the tax due. That said, you must still pay your estimated taxes if you owe anything by the April deadline, despite getting an extension.

So why the heck would anybody file an extension? Here are the main reasons.

Main Reasons To File An Extension

1) Your K-1s are late. Late K-1s are by far the main reason why taxpayers need to file an extension. A K-1 is a document given to partners in a business, S-Corporations, or trust and estate beneficiaries. Most of people who get K-1s are investors in private businesses. For businesses that operate as partnerships, it’s the partners who are responsible for paying taxes on the business’ income, not the business.

I only get one K-1 for 17 real estate crowdfunding investments thank goodness because they are all contained in one fund. Unfortunately, the K-1 wasn't sent by April 15, neither were a couple other K-1s for my venture debt investments.

2) Your 1099 forms are late or inaccurate. If you do any freelance type of work, you might never receive a 1099-MISC due to negligence. Or more commonly, the document was sent, but sent to a different address. Once you realize the document was sent to the wrong address, it may take time for the company to get back to you and resend your 1099-MISC.

Sometimes, a company you worked for may go out of business, as was the case with one startup I consulted for several years ago. Sometimes, the data may be inaccurate. For example, the company might have double counted or overlooked some of your invoices.

Or you might have asked the company to switch from paying you money as a sole proprietor to paying your S-corp if you incorporate halfway through the year, and as a result they might not issue you a 1099-MISC because 1099-MISC are not necessary if you are doing business with another corporation.

Related: How To Be A Rockstar Freelancer And Make More Than You Would At A Day Job

3) You're out of town for an extended period of time. Doing your taxes takes a lot of paperwork. Thankfully, most documents can be downloaded online. But some documents are not available online and must be snail mailed to an address. If you so happen to be traveling for several months at a time, then you need an extension.

I personally print out all my documents so I can look at them on my desk and input the numbers in my tax preparation software. To have to toggle between pages on my 13″ monitor would be a royal pain.

4) You might be superstitious about an audit. Some tax professionals theorize that filing an extension will decrease your odds of being audited, since IRS auditors must meet quotas in the first half of the year. Of course nobody knows whether this is true or not, but the earlier a return is filed, the longer it is in the system and thus subject to a review.

On the flip side, filing an extension might expose you to a greater risk of audit because there are less tax filings for the IRS to review. If you do your taxes to the best of your ability, then you shouldn't have to worry about an audit.

Audit Rates By Income, IRS

5) A major life event occurs around the deadline. Sometimes there are things that are much more important than filing your taxes by the April deadline. You might have lost a loved one or you might have gained a loved one through an emergency c-section that requires you and your partner to be in the hospital for a week.

Other times, you might get married or go through a divorce which can complicate a tax situation. Or perhaps your business or a business you invested in goes bankrupt or gets bought for big bucks.

6) Retroactive changes to the tax law after the April deadline that may benefit you. In rare instances, tax laws may change to your benefit. Instead of having to spend extra time, stress, and expense filing an amendment, you can just file an extension, hope that a beneficial tax law gets finalized, and then you're good to go. But in general, you can't do much to change your past income and expenses, e.g. can't suddenly buy a new SUV this year to deduct for last year.

Where your tax money gets spent by the government

Don't File An Extension Because You Can't Pay

Filing an extension only gives you extra time to file, but not extra time to pay. If you can't pay what's owed by April and end up not paying until October due to an extension, you will get hit with penalties and interest.

Here is what to do if you can’t pay all your taxes by the due date according to the IRS.

1) File on time and pay as much as you can.  File on time to avoid a late filing penalty. Pay as much as you can to reduce interest charges and a late payment penalty. You can pay online, by phone, or by check or money order.

2) Get a loan or use a credit card to pay your tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. This has to be the worst advice, and it goes to show how the government doesn't care how they get their money, just so long as they do.

3) Use the Online Payment Agreement tool. You can also file Form 9465, Installment Agreement Request, with your tax return. You can even set up a direct debit agreement. With this type of payment plan, you won’t have to write a check and mail it on time each month. It also means you won’t miss payments that could lead to more penalties.

Not having a complicated tax return that needs an extension filing is one of the great benefits of simplifying your investments. My finances have gotten way too complicated over the years that I'm considering hiring a money manager + tax adviser combo. That said, I still enjoy learning all I can about taxes.

Filing an extension is a nice option, but it makes me have to revisit my taxes all over again once I get all my K-1s. That's extra time that can be spent doing something more fun, like throwing a hot tub party at my secret hideaway in Hawaii for all readers who share my work.

Related: How To Pay Little To No Taxes For The Rest Of Your Life

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18 thoughts on “The Main Reasons To File A Tax Extension Beyond Late K-1s”

  1. A bit off topic, but I am in love with the giraffe picture! Is that San Diego Safari Park by any chance? :)

  2. Bummer!
    I filed and received my refund last month. Just this week I received a corrected 1099 from the brokerage company.
    I’ll have to file an amended 1040. At least I’ll be getting more $ back from IRS!

  3. Thanks, Sam. I’m a little less ignorant today than I was yesterday. I always wondered why people have to file for an extension. Now I know. Cheers.

  4. “This has to be the worst advice, and it goes to show how the government doesn’t care how they get their money, just so long as they do.”

    So true Sam!!! Your slacker tweet made me laugh too. We finished on Sunday and I thought that was good…because it’s not today right?!

  5. As I get more and more into ALT investing I’m learning about the K-1’s and started getting them. Never had one before last 2 Tax seasons. Secret society stuff.

  6. I have been filing an extension for the past five years now for both my LLC and personal. I think it’s more like laziness on my part. We usually file our returns around July but definitely will have to do better with time management next year. No problem with my K-I at all. I usually get mine around March.

  7. That’s the first I’ve heard of the possible audit avoidance! I can see how that might be true but we’ll never really know I suppose. Getting K1s is a royal pita but I’m glad to hear you didn’t end up having to get one for each investment in that fund. That would have been crazy! Great topic! I’m always intrigued by tax posts. Thanks!

  8. I wasn’t planning on filing an extension this year, but my CPA took on too many new clients and needed more time to sort things out. It didn’t help that realtyshares gave me their K1s only last week too. Oh well, it’s nice to not be rushed, but I’d prefer to be done.

    Thanks for sharing that audit chart! It’s interesting to see how low your chances are of being audited no matter what bracket you fall into.

  9. I got the K1 from RealtyShares just in time. I filed on Saturday and it’s all done. Yes!
    I also got a new card and put $5,000 on it. That’ll give us 80,000 points. The transaction fee is around $100, but that’s not too bad for all those points. I should have prepared more and applied for more cards. Next time..

    Another reason not to file an extension – Get it over with. Now I can move on and worry about something else.

  10. Sober Finance

    Using a program (TurboTax, etc) is a life saver, especially if you’re self-employed or have a side-business. The ability to take a screenshot of invoices, etc., and have them stored on their system is a godsend. No more last minute scramble…

    The audit chart is a great find — I assume yes, but would love to see the audit % fluctuations as staffing at the IRS has gone down in recent years.

  11. Douglas Litke

    My question about the K-1s you get. How many different states do you have to file for? How do you mitigate that?

    1. This is a key reason why I sold my MLP investments that generate K-1s. The tax complications tax me at least a couple hours extra/year, and now the income across states is getting significant enough that they may start asking questions.

      Technically, you are supposed to file a state tax return everywhere you earned income, and when a PTP / MLP earns income from a state, then that gets put on you to report as a partner. Even one state sending a demand would be really bad, and wipe out gains.

      Unfortunately, I exited the position just before it went up 10% :) But I exited to cut off this tax issue.

      I heard that if you want to do a PTP / MLP is to invest in it with Roth to skip the K-1 & state tax issues.

  12. Never even thought about it! I am assuming it is the same in Canada.
    My taxes are getting a little more complicated but still manageable, as long as I keep up with updating my rental properties spreadsheets during the year!

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