6 reasons to file a tax extension
Your taxes are due next month.
If you're coming late to this article in April, they're due very soon. But assuming you are reading this in March 2016, you still have time to put off doing your taxes or you have extra time to work on them. In fact, this year, because the filing date is on April 18 instead of the usual April 15, you have one additional weekend to stress and sweat over your taxes.
For some people, filing is a breeze. But if preparing your taxes feels overwhelming and is getting you down, you're probably considering filing an extension with the Internal Revenue Service. That would mean you could file as late as Oct. 17, 2016 (typically Oct. 15, but this year, Oct. 15 falls on a Saturday). But is filing an extension on your taxes really smart? Or are you just delaying the inevitable?
Maybe – and yes. In case you're wondering if you should file a tax extension, here are several reasons to consider doing so.
You don't have all of the paperwork or numbers that you need. This is the most common scenario in which someone would file an extension, experts say.
"If you don't have all the information to file the return completely and accurately, you should wait," says John Petosa, a licensed certified public accountant who teaches accounting at Syracuse University in New York. "The primary way that a person is audited either via a letter or in person is because the information on their return fails to match a 1099, W-2 or some other information form that was filed with the IRS using the taxpayer's Social Security number. Making sure you have all the information in your return is a wise reason to extend the return."
View the best ways to avoid a tax audit:
You're a serious investor. When you invest a lot, the result is a lot of tax-related paperwork.
Megan Kuchan, a certified public accountant at Clark Nuber PS in Bellevue, Washington, says there are three reasons her taxpaying clients often get an extension.
You're investing in hedge funds. "As more taxpayers invest in hedge funds or other complex entities, we're seeing more taxpayers extend their returns," Kuchan says. "These partnership structures usually extend their own return, providing investors with Schedule K-1 information sometime during the summer. This information needs to be included in the taxpayer's return, so they typically extend their return."
You have a lot of money overseas. "Taxpayers with foreign investments may have difficulty receiving the required information by the original deadline," Kuchan says, adding that in that case, many people will extend their returns to get the proper information from foreign jurisdictions.
You have no choice – your broker sent you incorrect information. "Many taxpayers receive original Form 1099s from their brokers related to interest, dividends or capital gain or loss by the end of February," Kuchan says. "However, brokers may end up providing corrected Form 1099s later in the year, resulting in taxpayers potentially needing to file amended returns."
You're self-employed. This isn't an automatic reason to file an extension. But sometimes all the paperwork a business owner needs hasn't come in by mid-April, says Steven Warren, a CPA with Lehrman, Flom & Co. in Minneapolis.
"For example, if the taxpayer is an owner in a pass-through entity such as an S corporation, a partnership or certain types of limited-liability companies, they may not get their Schedule K-1 until after the original filing due date," Warren says.
Ah, yes, that pesky Schedule K-1 again. Warren adds that the Schedule K-1 can often lead to tax filing extensions for beneficiaries of trusts and estates.
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So why not file the return on time and then file an amended return once the final tax information comes in the mail? Kaitlin Krozel, a CPA in Scottsdale, Arizona, says many of her clients ask that question.
"I always recommend against this because it creates more work on my end, which means more fees for them," Krozel says.
If you need extra time to try and reduce your tax liability. If you're in a high tax bracket, and you're paying a CPA to not only file your taxes correctly but not overpay on your taxes, then, yes, you may be a good candidate to file an extension.
"The extra time can help you with tax planning," Warren says. "Because you are further into the current year without having filed the prior year's tax returns, you will have a better idea of whether you should carryback a net operating loss."
Why is that important? "Because you will not be able to utilize it currently or elect to forgo the carryback because you are having a big income year, and you may be better off reducing your current year's tax liability," Warren says.
You recently moved overseas. You think the American tax system is complicated? Try being an American living and working abroad.
"My firm works with a lot of taxpayers who live overseas – expats – and they have a special extension to file if it is the first year they are filing since moving overseas. It is Form 2350," Krozel says.
If you've recently moved overseas, you may not need to file an extension, but you may want the extra time to file if you haven't yet qualified for the foreign earned income exclusion, which can reduce what you pay in taxes significantly. According to the IRS website, "For tax year 2015, the maximum foreign earned income exclusion is up to $100,800 per qualifying person."
You're a procrastinator. You knew this point was coming, didn't you? Yes, being disorganized or delaying tasks is a good argument for filing an extension. Despite your knowing April was coming since last April (and, hey, we aren't judging), if you are now trying to get your taxes done at warp speed, there's a good argument that you should file an extension.
"Rushing to avoid an extension could make for incomplete and erroneous tax returns," Warren says. "It's generally better to wait and get it right when rushing could lead to mistakes."
Copyright 2015 U.S. News & World Report
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