Pros and Cons of Getting a Tax Extension
There are many reasons you can choose to file an extension for your income taxes. Most likely, you simply need more time to gather all of your information or meet with your accountant. But is there a downside to filing an extension?
The short answer is no, there really is no Con of filing a tax extension. A common misconception is that the extension gives you additional time to PAY your taxes. Not true! The extension is only for FILING the tax return. Taxes must be paid by the applicable deadlines, or interest and penalties accrue.
Pros to Filing an Extension
There are two big Pros to filing an extension. First of all, you are not rushing and paying too much in tax! Making sure you have ALL of the possible deductions and credits takes time. Better to make sure you take full advantage of the tax code to minimize your taxes than to hurry up and file.
There is also evidence that filing an extension actually REDUCES your chance of being audited by the IRS. The IRS uses a score (called the DIF) to determine which returns they select for audit. The formula of the DIF score is a closely guarded secret, but people have done some reverse engineering and come up with some interesting findings. One of those findings is that returns with an extension statistically are less likely to be selected for audits.
If you think about it makes sense. The IRS has only three years to audit a return once you've filed it, and they have limited resources (e.g revenue officers). If they can only perform 100,000 audits, and the clock is running, it is reasonable to assume that they are selecting returns as quickly as they can. Therefore, having a return filed in October, puts you behind a return filed in April.
Clients often ask, "won't filing an extension raise a red flag"? Not at all!
Extensions
Individuals can normally file an extension by April 15th to file by October 15th. You can do this by filing form 4868.
S-Corporations and Partnerships must file an extension by March 15th to extend to September 15th using form 7004.
C-Corporations use the same form 7004, but the extension deadline is April 15th to extend to September 15th.
Final Thoughts
Ideally, if you own a business, taxes should be worked on year round. There are many options that go away after the year has passed. Working with Core using our Core Tax Process, you ensure that you are taking advantage of every opportunity to minimize your taxes. You receive the added benefit of NO SURPRISES when you receive your taxes!
