Don’t Be Afraid Of Extending Your Tax Return
Matthew Pore, Tax Senior Manager
Updated February 2016
It is a common misconception that obtaining an extension of time to file your individual income tax return triggers an IRS red flag and increases your odds of being targeted for an audit. On the contrary, there is no known connection between filing an extension and being selected for an IRS audit. In fact, extending your return may actually decrease your chances of an audit by allowing the time to prevent inadvertent or otherwise unavoidable errors and omissions.
The IRS audit selection formula is heavily guarded with only a few people inside the organization knowing the recipe and even fewer outside the organization. There are a variety of audit selection methods used by the IRS, including: random selection, computer screening, statistical formula, document matching, and related examinations (i.e., issues or transactions of related taxpayers, such as business partners or investors, whose returns were selected for audit). Overall, the odds of being selected for audit are low each year. According to the most recently published IRS Data Book, 1.03% of individual income tax returns were selected for examination in 2012.
An extension allows taxpayers an additional six months, until October 15, to timely file their return. For many taxpayers, filing an extension is routine because they must wait for tax information from flow-through investments, like publicly-traded partnerships or other investment vehicles, which often does not arrive until mid-April, or sometimes as late as September. Even if all of your tax information comes in before the April 15 deadline, it may be beneficial to extend if some of that information arrives late (after mid-March) or has the possibility of being corrected (Forms 1099 from brokerage houses). Moreover, if you have a special situation in a given tax year that requires additional investigation (i.e., sale of stock with unknown basis), additional calculation (i.e., sale of rental property), or a decision about how to treat an issue for tax purposes (i.e., whether to elect installment sale treatment or special bonus depreciation on capital property), it may also make sense to extend.
Filing an automatic extension of time to file your tax return does not extend the time to pay any tax due. Therefore, if an extension is necessary or desirable, it is important to provide your tax advisor with solid estimates of your income. Even if you already know you will be extending, it is still important to get your information in as early as possible, even using estimates, so that your tax advisor can accurately calculate any amount of tax due with your extension (and so you will know sooner than later whether tax is owed).
The IRS generally is allowed a 3 years period (known as the statute of limitations) during which they can propose adjustments to a tax return. The beginning of that period by default is April 15 (even for those who file early), but the 3 year period begins on the date returns are filed for those who request extensions.
Besides the facts that extending will not cause you to be audited by the IRS and may even minimize potential inaccuracies, there are many other potential advantages to extending your tax return, in the right situation. Here are a few:
- It’s automatic: You are not required to explain to the IRS why you want an extension. You simply file the appropriate form and pay any tax due. The process is straightforward.
- More time: Filing an extension provides the taxpayer an additional six months to receive and gather tax information, finalize the return, and timely file. As discussed above, this extra time also gives the taxpayer and tax advisor time to consider the best way to treat certain tax items, research missing information, and confirm proper calculation of uncommon transactions or events.
- But not too much time: The extended due date for individual income tax returns is October 15, but once you have received and gathered all your correct information, you can finalize your return and file any time before the extended deadline. There is no obligation to wait until October to file.
- Fund retirement plans: Extending provides as much as an additional six months for self-employed individuals to fund certain retirement plans.
- Recharacterize IRA contributions: As long as the taxpayer’s IRA is funded by the April 15 deadline, the nature of the contribution can be changed up until the October 15 extended deadline.
- Peace of mind: Rather than dealing with the inevitable anxiety of rushing to meet the April 15 deadline when information is difficult to obtain, extending can often afford the taxpayer some peace of mind that their tax liabilities are satisfied while allowing them additional time to get their paperwork completed accurately.
If you feel like an extension is appropriate for you, or want to learn more about extending your tax return, please call your BNN tax advisor at 1-800-244-7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachment) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.