Why You Should Always Extend Your Returns
Hey, we’re down to the wire. Have you filed your taxes yet? Many people are throwing around the fun extension to see if that’s the right move for them.
Let’s clarify some things.
There are a lot of myths and problems around extensions that people just don’t understand. In my many years of practice, many people have told me, “oh, I don’t wanna file an extension.” And when I push back and say, “tell me why”. “Oh, because I always filed by the April deadline”.
Alright, but again, why? And usually there’s no good answer. The real answer is they’re afraid because they don’t understand it. So let’s clarify some things; make this easier—an extension is actually a wonderful tool that I encourage everyone to use, and I’ll explain why.
Why file an extension?
Filing an extension, first off, gives you more time to gather the information. There are actually two deadlines that happen on that April day, whether it’s April 15th or shortly thereafter.
One, you must make a payment if you owe the money with the tax return, if you owe the IRS money, or the states it’s due, then there is no extension of time to pay.
What there is an extension of is time to file, time to gather all of the information, time to make sure it’s in the rightful places before you submit that tax return to the IRS.
So if you’re saying, I wanna file an extension because I don’t have that kind of money and I owe a lot of money, that’s not a valid solution. An extension will not save you anything and will not give you any break on the day the money is due. It’s still due mid-April.
So why would I want an extension, even if I’m getting a refund? Maybe you want an extension.
Advantages of an extension
Let’s talk about a couple of advantages of an extension.
The first advantage is it gives you more time to gather information. Maybe you haven’t had the chance to go through and get all your charitable contributions lined up and you’re at the last minute down to the wire and you can’t seem to find some things or you’re missing a receipt or two.
Give yourself a break.
You’ve got a little more time. Gather it, do an estimate and figure out how much you owe. If you owe anything, pay that in and gather all of the information to file an accurate return.
Next, there are several things that allow you when you extend to give you an extension of the time to do certain tax maneuvers.
So for example, if you’re self-employed and you wanna make a retirement contribution, but you’re not sure, or if you don’t have the money just yet, you can actually extend your tax return and make that contribution by the extended due date.
The extended due date for individuals is October 15th or thereabouts. So October 15th, you could make a retirement contribution and lower your tax liability from the prior year in 2022.
Good deal gives you more time. Leverage that time in this relationship with the IRS.
The third reason that you may wanna file an extension is to attempt to reduce your audit risk.
Now, I know a lot of people say, “oh, there’s no truth to that”. And if you ask the IRS, if I file later, will I have a lower audit risk? They will tell you no.
But I’ve seen scientific studies and there is something to this. The IRS has a certain number of returns that they wanna review each year and based on criteria, and the later you fall, the more their auditors are already busy and have already got cases in place, they may not get around to it.
So even if it’s not a hundred percent true, if it gives us a shot, it’s worth that shot! It’s a free stab, right?
File closer to the deadline
So take that opportunity to extend your returns file closer to the deadline. Don’t forget about it, but file closer to the deadline to attempt to reduce your audit risk.
And one of the really important new thing that has come about in the last two years is interpretations of laws are changing retroactively now.
So just last week, the IRS came out with an update and said, if you filed your return early on and you received a state rebate check last year, several states in the US issued excess funds that they had in their coffers back to their taxpayers as a form of a rebate. They said, now, “oh, we think that ought to be taxable”. Prior to this announcement, they were not taxable.
So you’re not off the hook. If you filed early and you left that off, technically you owe the money, and if you’re ever audited, the IRS would charge you back for that. So they want you to amend your return to add that to it.
Now filing one tax return is hard enough, let alone filing multiple returns with amendments based on changes and new interpretations. There may even be something in your favor that comes out.
So for that other reason, I also say file the extension, put it in the marinade, let it hang out. So finish up your returns well in advance. Give yourself a break.
Stick it in the marinade over the summer. Set yourself a little reminder or ticker to come back to that and file it later on. Review it again with a fresh set of eyes. Make sure you didn’t forget anything and file them.
So for all of our clients, that is our strategy. All returns are done well then advance. We put them in the marinade. Let them hang out for a while. If anything comes up, if anything gets remembered, you wake up in the middle of the night and say, “oh my gosh, I forgot to record. I forgot to deduct this deduction”. No problem. We can add that in for you.
So use a freebie that the IRS gives you. You got a great benefit there. Use it. File an extension today.
For additional read: IRS Says “Wait a Minute”
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Donna Bordeaux, CPA with PYOPAccounting.com
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly, and knowledgeable can be a part of your relationship with your CPA, as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.