When to File a Late Tax Return or Request a Tax Extension

April 15th is the normal deadline to get your income taxes filed with the IRS. You can always request  an automatic 6-month extension, which gives you until October 15th to file your taxes using form 4868.  Be aware, that if you elect to to extend your filing deadline, it is not an extension to pay. In fact, if you push off your filing the IRS will charge you interest for an underpayment. If your underpayment is greater than 10%, you will incur a Failure to Pay Penalty which is .5% on the amount owed. The worst thing that you can do is to file your taxes late without first filing for an extension.

But why would you want to file your tax return late? Well there are many good reasons for doing so with some being more obvious than others.

• You Simply Cannot File by April 15th Due to Unforeseen Events – This may be a death in the family, a natural disaster, sickness in the family, incarceration, your records were stolen, and so on.  Remember, the IRS does not need a reason for you to request a filing extension–the extension is automatic.
• You Plan On Purchasing A House and Realizing the Tax Credit for 2009 – When Congress extended the home-buyer tax credit last year it had a few notable provisions.  As long as you purchase a home on or before April 30th, 2010 you can qualify for the tax credit. Furthermore, if you can secure a contract before May 1st, 2010 with a closing before July 1st, you can also qualify for the tax credit as well. Therefore, if you plan on purchasing a home and you are not sure if the process will be completed by April 15th, it makes sense to file an extension. Alternatively, you can always claim the tax credit on your taxes for 2010.
• You Converted a Traditional IRA to a Roth IRA and It Lost Value – If you converted a traditional IRA to a Roth IRA in 2009 you would be expected to pay taxes on that conversion since a Traditional IRA is funded with pre-tax dollars.  However, if you Roth lost money after the conversion it makes no sense to pay taxes on money that is not there anymore. Reversing a Roth IRA back to a traditional IRA is called a “Recharacterization.” The deadline for this reversal is October 15th of the year after the conversion to prevent tax liability. Therefore, a tax extension will allow you to lower your tax liabilities if you plan on reversing a Traditional to Roth conversion. If you are doing this recharacterization you will need to submit proper forms and documentation to your Roth IRA holder. It is best to speak with a tax professional here as well when filling out your 1040 in order to make sure you follow procedure in showing the IRS that you converted it back.

Realize with points 2, and 3, you can always amend a tax return if you have already filed by utilizing Form 1040X. The downside to filing an amended tax return is not only is it more paperwork and work than you need, but amended tax returns typically have a higher probability of getting audited.  Tax returns can typically be amended up to three years after the due date of the original tax return.