What is an Automatic Extension?

The concept of an automatic extension is applied in two different scenarios. In business, an automatic extension is a provision or clause within a contract that allows the agreement to automatically renew for a period of time after reaching the expiration date that appears within the body of the contract. A broader application of the automatic extension has to do with the filing of taxes, and the granting of an additional period of time to make those filings, with the permission of the government entity that normally receives and processes the tax returns.

As part of a business contract, the automatic extension is often thought of as a convenience for both the entity providing goods or services, and the entity that receives them. For the provider, the ability to simply enact this clause, sometimes referred to as a rollover provision, simply means that unless the client chooses to end the relationship according to the terms of the agreement, business will continue as it has since the contract was first enacted. Since most extensions of this type require that the client proactively contact the provider prior to the expiration date and specifically state that he or she does not wish to renew the contract, the provider will notify the client after the fact that the agreement has automatically renewed. Usually, the extension will call for the continued provision of the same goods and services at the same pricing documented in the original contract.

For the customer, the automatic extension is often a convenience. Assuming that the client is satisfied with the business relationship, including the pricing, there is no need to spend time entertaining new bids from the current supplier or any other potential suppliers. In fact, the client has to do nothing at all; the automatic extension goes into effect the first business day after the expiration of the original contract, allowing business to continue as usual.

As applied to taxes, an automatic extension is a tool that can help taxpayers avoid high penalties for filing returns late. While the exact processes vary, many national revenue agencies allow filers to request that they be allowed to delay filing due to situations that are beyond their control. An example of a reason for applying for this type of extension would be if the taxpayer were physically incapacitated for the period leading up to the usual filing date, or if there were documents required for the filing that were not provided to the taxpayer in a timely manner. It is important to note that some countries around the world will accept a broader range of reasons for granting this type of extension, while others consider only a very small number of reasons to be acceptable.

In most cases, when a tax agency grants an automatic extension, filing date is delayed for six to eight months. This does not necessarily mean that the taxpayer will not incur some type of interest penalties in the interim period. However, the rate of interest applied will be considerably less than if no extension was requested and the return is filed late. Most tax agencies will provide taxpayers with detailed information on when and if an automatic extension is possible, and what procedures must be followed in order to apply for the extension.