Is It Good Or Bad To File A Tax Extension?

Some people are scared silly of not filing their taxes by the April 15 deadline (It is moved to April 18th for 2022 due to Emancipation Day falling on April 15.).

As a tax expert who spent over 20 years owning a successful tax business, I can tell you there is absolutely no reason to raise your blood pressure about the looming tax deadline. In fact, there may be valid reasons to adopt a new point of view.

Tom Wheelwright, CEO, and founder of the CPA firm ProVision, was recently quoted by ABC News saying you may have a lower chance of being audited if you file an extension. Many advisors in the tax industry share the common belief that there is a “tax audit quota,” which begins around the tax filing season.

The theory is that the majority of these quotas are filled well before the April 15 extended deadline. In keeping with that presumption, if your return is not in the hat when most of the tax returns are being pulled for audit, you may have reduced your audit chances by well over 50%. Personally, I have read and seen enough with my experience over the years to firmly believe that extension is a great word!!!

Other benefits of filing an extension are:

• If you are rushed, an extension gives you more time to properly put together the most accurate tax information and document all your expenses to reduce your tax liability to the lowest amount legally allowed.
• An extension gives the self-employed more time to make a retirement contribution that could reduce your tax liability as you are prepare for your future.
• If you are using an accountant, an extension will allow you to have him work on your return when he is not so rushed, which will seriously reduce his chance of error.

What a tax extension DOES NOT DO is give you longer to pay the tax you owe! It is an extended time to file, but you will face penalties if you have not paid in enough into the Internal Revenue Service to be in “safe harbor.” “Safe Harbor” means that you have paid in enough tax dollars to cover 100% of the current years’ tax liability (which is hard to know without having prepared your current tax return) OR 90% of your tax liability for the previous tax year (you are looking for the line that says this is your “total tax,” which is Line 63 on the 2014 1040 form).

So – if you are 100% positive you are getting a tax refund – there is no reason to worry about a payment with your tax extension.

If you owe, you need to send a payment with your 1040. And while you will save some penalties if you pay enough to be in “safe harbor,” this may not be enough if there is a considerable increase in your taxable income from the previous year. I highly recommend checking with your tax professional to make sure you are adequately covered.

How do you file an extension? There are many ways in which I will outline a few in just a moment. But no matter which method you select, YOU MUST retain the proof of filing. If this is mail, make sure you have some form of return receipt or tracking. If this is electronic, make sure you retain confirmation. File this proof with your tax information for the current year. I have witnessed, and personally experienced, times this proof proved priceless!!

Ways to file:

• You can have your accountant file your extension for you. Many do this automatically if you are their client but remember the responsibility remains on you!
• You can file your extension by mail using IRS Form 4868.
• You can use many online efile services. TurboTax has a free filing service. Other services are available for a charge.

Wishing you many happy returns –

Stay tuned for more business insight…