Co-Author: Riana Linsky, CPA
Have you ever put your tax return on extension? If so, were you worried? Many taxpayers have misconceptions about what an extension is and the implications of filing an extension.
What is a tax return extension?
If you’re not able to file your tax return by its due date, April 15th for individuals, or if you simply decide that you need additional time to consider filing positions, you can file an automatic six month extension with the IRS using Form 4868. The extension gives you additional time to complete and file your federal and Oregon returns.
The extension is only an extension of time to file your return and should be accompanied by payment of the tax you expect to owe. If balances are still due after April 15, you will be subject to interest. The IRS interest rate is currently 3% per year, which is not deductible. If you pay at least 90% of the total tax due with the federal extension, there is no federal penalty. Otherwise, a penalty of ½ of 1% per month applies until the total tax is paid. Oregon’s interest rate is 4% and the penalty, which applies to all balances due after April 15, is 5%.
An extension gives you and your tax professional six more months to get everything in order and time to wait for missing information, such as a partnership or estate K-1. It gives you time to see whether the IRS or courts will clarify a law(s) by ruling on an issue of importance to you. You get an opportunity to see whether a deduction claimed in the extended year, or a later year, will yield the best savings. By October you have a good idea of the tax rates and income you will have in the next filing year, and can make a meaningful tax comparison. Maybe you are a student and you are waiting for your parents to complete their returns, which affects the calculation of your taxes. Maybe you are in California and just can’t face coming home to the Eugene April rains. (Yes, it will be raining in April)
Additionally, an extension can help your tax advisor to more calmly and thoroughly review your return. Those last minute returns completed just before April 15 are done by tired accountants, with tired brains and tired eyes. Better to give your professional a bit more time to focus on your issues and to learn the intricacies of any new laws.
Do you need to have a good reason to file an extension?
Absolutely not! The extension is automatic. All the government really cares about is receiving your tax dollars timely.
Will a tax extension increase your odds of being audited by the IRS?
It is our opinion that having an extension will not increase your risk of an audit. In fact, taking extra time to ensure your returns are complete and accurate will help you. Extensions may actually reduce the risk of being selected for audit. The IRS sets a targeted quota of returns that should be audited each tax year. A majority of returns are filed by April 15th and most returns audited are selected from that group. Due to issues of law and missing information, the largest and most complex returns we prepare must generally be extended every year. Our experience is that these extended returns have not been selected for examination by the IRS any more frequently than returns filed by April 15.
Extensions do not cost anything in and of themselves. As long as you make your tax payment by April 15th, there are no additional fees or penalties required for the extension.
In conclusion, if your CPA suggests obtaining an extension, you should keep calm. Millions are filed every year and the extension does not put you at any additional risk of examination. It could instead provide you with greater peace of mind.