Fall is by far my favorite time of year. The leaves are turning, the weather is cooling, baseball playoffs are in full swing... It seems nearly perfect -- until you remember that you haven't yet filed your taxes.While the majority of taxpayers file their tax returns on time in April, more than 10 million taxpayers (just more than 7% of the total number of filers) will file in October. Those are taxpayers who elected to file an extension by the April 15 deadline.
To file an extension, you simply complete a federal form 4868 with your name, address and tax ID information, along with an estimate of any taxes that you might owe. Assuming that it's timely filed in April, applications for extension are granted automatically by the IRS for a period of six months, no questions asked.
It's ridiculously easy. So much so that many taxpayers are hesitant to file for an extension because of the perception that an extension will trigger an audit. After all, they wonder, surely the IRS will assume that your failure to file in April is somehow indicative of bad behavior. Those taxpayers believe that filing is extension (especially if you do it year after year) is the equivalent sending the IRS a personal "audit me" invite.
The statistics, however, don't bear that out at all. Statistically, your chances of getting audited are fairly low to begin with: about 1 in 150. Certainly greater than your chances of getting hit by an asteroid (1 in 500,000) but less than dying in a car accident (1 in 100).Complicating that statistic even more, the overwhelming majority of returns actually pulled for audit by IRS are for cause. That means that something on a tax return caught the eye of the IRS.
The IRS is generally looking for patterns: out of the ordinary deductions and expenses, forms W-2 and 1099 that don't match up, inconsistent income and expense reports, etc. Filing an extension, which is clearly allowed by law, is not a reason for the IRS to flag your return.
In fact, some that practitioners believe that filing an extension may actually reduce your chance of audit. Small business owners or self-employed persons in particular may not have all of the information that they need far enough in advance of the April 15 filing date to put together a proper return.
The extra time may allow a taxpayer to file a complete and accurate return instead of a poorly put together, rushed return. Submitting a flawed or incomplete return is likely to get your return flagged for audit. The extra time may make the difference.
Does that mean that extensions make sense for everyone? Of course not. Your individual facts and circumstances will determine what's best for you. Some taxpayers file early because they want to get their refund as soon as possible. And others, like my dad, just can't stand to file late.
But if you're just not ready to file in April, an extension makes sense. And if you are one of those taxpayers who files an extension occasionally, or even every year, it's important to keep this in mind: filing an extension is just an extension of the time to file, not the time to pay.
When you filed your federal form 4868 in April, you had the option of paying any tax due at that time. Hopefully, you took advantage of this opportunity. Otherwise, when you file your actual tax return in October, you'll pay any federal income tax due plus penalty and interest. Penalty and interest begins to accrue on April 15, when the tax was first due, and not in October.
If you're one of those taxpayers on extension, take a couple of deep breaths: you have a few more days to put together your return. Keep in mind that the same rules that apply to the April 15 deadline still apply, which means that your return must be e-filed or postmarked by or before the deadline (October 15). Plan now to get your return in on time!
What about you? Do you file on extension? Take our poll:
