What are some of the benefits of planning on filing an extension on federal and state taxes. Is this a strategy you should consider?
Remember in years’ past when you got your W-2s, K1s, international banking and asset disclosures, foreign income data and other important tax documents in January, and you thought to yourself “this is going to be the year that I get my taxes done early!” Then a few days passed, followed by a few weeks. Then you peeled the month of February down from your calendar, and soon it was March. Does it surprise you that the majority of US and California tax returns are filed on or immediately before the associated deadline?
First off, don’t worry. Lots of people procrastinate, and most people turn their procrastination to full power when it comes to their taxes. It’s not fun to think about or to do your taxes, so it’s perfectly understandable that with the final weekend before Tax Day, you’re still waiting to put pen to paper.
The Benefits of Planning for an Extension
The first and most obvious issue associated with planning to file an extension on federal and state taxes is the responsibility to pay taxes which are owed on the date your returns are required (usually April 15, or the fiscal year end of a corporate year). An extension is usually not the best strategy for those who cannot simply pay their taxes on time, but this is a factor which should be discussed with your Allen Barron tax professional.
Extensions are somewhat automatic here in California, but the IRS requires the submission of appropriate extension forms. An extension of six months can be sought for tax returns as well as IRS FBAR reporting.
An extension can relieve all of the pressure of accumulating the information required by tax forms, completing returns and getting them filed by the due date. An extension relieves the taxpayer of failure-to-file penalties which can increase tax burdens by 25%. There are retroactive changes in federal and state tax laws which might occur after the filing date which could impact your obligations as a taxpayer on the prior years’ return.
You may also simply need more time to gather information which is required to complete and substantiate the information contained in your tax returns.
Does an Extension Reduce Your Risk of an IRS or California Tax Audit?
There is a substantial body of experience and fact which suggests filing for an extension on federal or state taxes actually reduces the likelihood of an IRS Audit or California Tax Audit. The primary reasons for this are the accuracy of the extended return and the impact of the statute of limitations on an audit.
Data from the IRS shows an amended return will receive additional scrutiny which can lead to an audit. It is more important, therefore, to ensure the information contained within the return is accurate and substantiated. Extensions provide more time to accumulate supporting data and reports in order to submit a more accurate return. There is presently simply no data which suggests that extended returns result in a higher audit risk.
The IRS has 3 years from the original filing deadline (April 15 for most) to audit a return. California’s statute of limitations for an audit is four years. The failure to file or providing a return which reflects an omission of 25% or more of the actual income can toll the statute of limitations or remove it altogether.
Decisions about Whether to Consider an Extension and if an Extension on Federal and State Taxes Might Reduce the Risk of Audit Require Expert Analysis and Consultation
There are absolutely advantages to consider an extension on federal and state taxes and associated returns. However, these should be discussed with your Allen Barron tax professional. It is absolutely possible to reduce pressure, increase accuracy and ultimately reduce the likelihood of an IRS or California Tax Audit.
We invite you to review the strong recommendations of former clients and contact Allen Barron or call today to schedule a free consultation with an IRS Tax Professional at (866) 631-3470.