What Does Extending your Taxes Mean to You?

by Tiffany J. Morisue

Why should I extend?

The Internal Revenue Service prefers that you file a complete and accurate return. A return you have to rush through, do not have all information for, or make estimates of figures for is unlikely to be complete and accurate. Thus, it is better to file an extension if you are approaching April 15th and you do not have all information needed or otherwise cannot file complete and accurate returns.

If you use a tax professional and you are getting your tax information to him or her just a few weeks or so before April 15th, do not be surprised if he or she indicates an extension will need to be filed. You are more likely to have a complete and accurate return if your tax professional is not trying to rush to make the April 15th deadline.

A few more comments for those of you who use tax professionals. If it is approaching the tax deadline and you have not yet contacted your tax professional, do not be surprised if he or she is unable to speak with you when you call his or her office. Also, do not assume that just because you used his or her services last year they will file an extension for you without you specifically requesting it. Tax professionals are very busy dealing with many clients and working long hours all of tax season and they get even busier as April 15th approaches. Moving forward, you should consider getting in contact with your tax professional’s office well in advance of the tax deadline to determine what he or she needs to file an extension, if necessary, and prepare your taxes.

In addition to having a complete and accurate return, there are certain planning opportunities that can be taken advantage of if you or your tax professional is not forced to rush through your return. One example is funding certain retirement plans such as SEPs and Keogh Plans - these can be funded for the prior year through the extended deadline of the return that falls in the current year. Some plans, such as a SEP, can actually be established for the prior year up through the extended due date of the tax return. It is important to note that traditional and Roth IRAs need to be funded by April 15th to qualify as contributions for the prior year. For more information on such planning opportunities for the year just past as well as the current and future years, you should consult with your tax professional.

What are the common concerns over extending?

As referenced earlier, many individuals are adverse to even the idea of extending due to concerns such as being “flagged” as a late filer, being assessed penalties, or being more likely to be audited. Filing an extension in and of itself is not going to raise any “red flags” or cause problems as long as your extension is timely filed and the tax due is paid by April 15th. As for being audited, you are more likely to be audited if your return is incomplete, includes estimated figures, or is inaccurate.

Another concern individuals have is that it will cost them more to file an extension. The IRS does not charge for filing an extension. Your tax professional may charge you for doing so, but the fees charged most likely will be far outweighed by the benefits of the return being complete and accurate. Incomplete and/or inaccurate returns can result in you being contacted by the IRS and generally require that an amended return be filed. Your tax professional will likely charge you for preparing an amended return. If additional tax is due, penalties and interest may be assessed. A complete and accurate return is much less likely to result in any correspondence from the IRS. Additionally, it includes an accurate tax liability, which means lower taxes or reduced penalties and interest as related to an understated tax liability. Like with many things in life, it is better to do something right the first time as there is more time, effort, and expense associated with having to correct something later.

Yet another reason that some individuals do not want to extend is because they are in the process of buying a new home or refinancing and their lender is requesting a copy of their tax return. Many lenders will accept a copy of an extension along with copies of documents substantiating income (W-2s, 1099s, K-1s, etc.) and copies of the prior year tax returns. 

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