The tax preparer's guide to 1040 extensions: Accurate estimates, timely filings

Filing an individual tax extension, when used correctly, can be a powerful and strategic tool for both taxpayers and tax preparers. Far from being a sign of delay or disorganization, extensions play an important role in ensuring accuracy, managing workload, and protecting client outcomes during and after filing season. This guide draws on official IRS guidance, along with real‑world insights and consensus feedback from experienced tax preparers and the taxpayers they serve.

• The 1040 tax extension: Origin, progression and current use
• The 1040 filing deadline: Fast facts about federal tax extensions
• What about filing a state tax extension?
• Acceptable methods for filing an extension
• Special groups given additional grace with extension filing
• Scenarios where filing a tax extension makes sense
• Main benefits of filing an extension
• Concerns when filing an extension
• Wrap up: Summarizing the value of extension filing
• Three tax technologies that can help minimize the need to file an extension
• How the TaxWise: Smart Tax Office solution can help preparers file returns on time and with accuracy

The 1040 tax extension: Origin, progression and current day use

The individual tax extension was first developed out of the realization that even the most well-intentioned tax filer may occasionally experience delays (often beyond his or her control) when it comes to a timely filing of their 1040 return. Prior to the availability of a formal tax extension request, taxpayers had to formally submit a hardship request to the IRS for approval to file later than the normal tax deadline. Seeing the need to offer taxpayers some grace, the IRS introduced a much simpler process with introduction of the individual 1040 tax extension in 1972, which has been updated up to present time:

• In 1972 the first 1040 tax extension was first introduced via tax Form 4868. It provided taxpayers an automatic 2 month deadline extension.
• In 1982, the IRS increased the extension period to 4 months.
• In 2005, the IRS simplified the modern iteration of the extension whereby taxpayers could submit a Form 4868 for approval to its current 6 month extension period.

The current version of Form 4868 has come a long way since its first inception, with steady increases in its use year over year. In fact, the most recent IRS data confirms that approximately 19 million taxpayers utilized this tax tool in the 2023 tax filing year. 

The 1040 tax filing extension deadline: What you need to know

With extension filing continuing to grow in popularity with both tax preparers and taxpayers, it is important to establish what filing a individual extension actually does:

• Grants taxpayers an automatic six month extension to file their completed return, regardless of reason.
• Allows taxpayers to make an estimated payment when extending their filing date. 
• Helps filers avoid the 'failure to pay penalty'. Usually 0.5% per month of unpaid taxes.
• Helps filers avoid the 'failure to file penalty'. Usually 5% of unpaid taxes.
• Provides more time for taxpayers to deliberate and file their tax return correctly (often best done with the help of a professional tax preparer).

Other notables while talking extension specifics:

• Filing an extension does not mean you’re getting an extension on making any required tax liability payment. It just extends ones tax filing deadline. It is important that taxpayers make an accurate estimated payment, as underpaying (or paying less than 90% of ones final tax liability) could trigger late payment penalties.
• There is no need to worry about filing an extension, if a taxpayer is certain they will be receiving a tax refund.
• Though not the scope of this article, a business tax return extension is also an option available to those filing on behalf of an entity. Form 7004 is the business equivalent of the individual Form 4868.

What about individual state tax return extensions?

For the majority of US taxpayers, filing a state tax return is also a requirement. So what does one do if they wish to also file a tax extension for their state return? 

In some states this is an automatic process when one files a federal tax extension. But not every state is the same. Three scenarios are possible depending on which states you wish to extend your filing date.

• Automatic extensions for some states 
• Unique extension requirements exist for some states
• Manual extensions are required in some states (separate from the Federal 1040)

Acceptable methods for filing a tax extension

Once a tax pro (in consultation with the taxpayer) has made the decision to file an extension, there are two methods for filing:

• Paper filing: Taxpayer signs a physical Form 4868 attached with estimated tax payment, post-marks before or by the original tax filing deadline (generally the 15th of April) and mails.
• Electronic filing: Taxpayer e-signs (submits) a Form 4868 with estimated tax payment and efiles before or on the original tax filing date (generally the 15th of April).

In short the original tax filing date remains highly important when it comes to successfully filing your tax return extension. Don't miss the date!

Special groups granted automatic tax extensions (that do not require a Form 4868 filing)

Some groups receive special automatic tax extension privileges, as result of their residency, job capacity or circumstance. They include:

• Military Service Members Serving Abroad
• Combat Zone Service Members
• US Citizens / Residents Living Abroad
• US Citizens Living in Federal Disaster Areas

If you are in one of these groups, the IRS has made it less burdensome to claim a tax extension. 

Common cases where filing an individual tax extension makes sense 

Now that readers have a general understanding of the origin, purpose and process for filing a tax extension, the next obvious question likely on the mind of a tax preparer is...'What real-life scenarios warrant using a tax extension?'

Some common cases where a tax preparer may opt to file a 1040 tax extension include the following:

• Late arriving tax documents of clients: It happens. Sometimes taxpayers are unable to obtain an accurate and timely copy of a key tax document.
• Significant life events of clients: Life happens. Sometimes events, such as divorce, death, an employment change, starting a new business or a family adoption make filing a tax extension a smart move. Other life events include natural disasters or military deployment.
• Complex tax situations that require time to consider for clients: Where does one start. There are many complex tax scenarios whereby filing a 1040 tax extension might make sense. Some common scenarios include, delays in obtaining a schedule K-1 (as a shareholder in a business), complex cost basis corrections for active investment traders (1099s, cryptocurrency and digital assets), trusts, estates, as well as foreign income complexities.
• Client simply procrastinates getting needed documents to the tax pro: You hate to see it, but procrastination is a weakness of a many well-intentioned taxpayer clients.
• Agency or software filing issues arise: While tax software technology (both private and public sector) has positively transformed the way tax professionals file returns, it too can experience issues on very rare occasions. On these rare occasions, filing a tax extension may be the only way forward (for a brief time).

Most every tax season, it is not unusual for tax preparers to encounter one or several of the above-mentioned filing scenarios. 

Benefits of filing a tax extension

Having just reviewed the most common scenarios that warrant the possible filing of a 1040 tax extension, it is easy to see what the benefits are. 

Filing a timely tax extension:

• Takes the pressure off both the tax preparer and taxpayer (for a time).
• Keeps the taxpayer compliant.
• Allows the tax preparer to meet the normal filing deadline for other customers in their book of business.

Needless to say, these are huge benefits to filing a tax extension.

Concerns when filing a tax extension

With every action there are both benefits and drawbacks. Though some drawbacks are not significant, they are worthy of tax preparer consideration. 

Some drawbacks to filing a tax extension on behalf of a customer are:

• It extends your work season: This is not a problem, if extending is due to a legitimate issue that is out of the control of both parties. However, if a tax pro is extending a return due to taxpayer procrastination or issues with tax document collection, then it's mission critical that said preparer seek to mitigate the issue asap.
• Extending for easily correctable issues can reward bad behavior in your customer base: See above point. Don't ask for more of the same. The procrastination of one client could spread to others (especially if they are close contacts).

Addressing bad taxpayer habits can sometimes be a touchy topic. However, new tax technologies are making it easier than ever for taxpayers (even the repeat procrastinators) to securely transmit their personal tax documents, to ensure a timely filing. 

Summarizing the individual tax extension and how new tax technology can help

In this article we’ve summarized the main reasons for tax preparers utilizing the individual 1040 tax extension and the processes for their proper filing. As a whole the overall use of tax extensions is a net positive for stabilizing tax preparer workload and keeping taxpayers compliant.

However, for extension filing cases where customer logistics or workflow bottlenecks are the primary cause, help can often be found within the latest tax technologies.

Three current technology tools that can help tax preparers

• AI-powered tax data extraction tools: With the click of smartphone camera, taxpayers are now able to send their tax documents securely to their tax pro. And better yet, with the help of AI, taxpayer data can now seamlessly flow into the taxpayer's return, reducing time and data entry for the tax preparer.
• Secure document portals: Taxpayers no longer have to rely on sending documents via mail or unsecure emails.
• AI-powered tax research: Questions about complicated tax matters rank as one of the primary reasons tax clients delay in moving forward with their tax filing process. By using AI to master the most up-to-date and trusted tax libraries, professionals can minimize delays in many 1040 engagements.

TaxWise makes it easy to file returns with accuracy and timeliness

If you're looking to improve your overall tax return workflow, whether filing by the April deadline or on extension, TaxWise®: The Smart Tax Office is your ideal solution.

If you're asking these questions, consider how TaxWise can help:

• How can I improve productivity in my tax preparation business? TaxWise offers industry leading AI-powered data extraction, ingestion and mapping tools that eliminates barriers for taxpayers to engage with your office. Making use of these tools can go a long way in helping minimize the need to file customers on extension.
• Is it easy to file a 1040 extension with tax preparation software? TaxWise makes filing tax extensions for both your 1040 and business return clients, simple and easy.
• What tax research tools can I use to answer complicated tax questions, quickly and accurately? TaxWise integrates seamlessly with CCH® AnswerConnect, which incorporates an easy to use AI-assisted interface. With said integration, tax preparers can obtain trusted, yet plain-spoken answers to the most complicated tax questions in seconds, and in formats that are easy to email or share publicly.

Want to learn more? TaxWise: The Smart Tax Office solution represents the evolution of the total tax software package. Visit our website or schedule a live or on-demand demo session to learn how this industry leading solution can address all of your tax prep business needs.