Many taxpayers are under the assumption that it’s bad to delay filing your taxes by filing an extension. While individual tax returns are due April 15 each year, you can file an automatic 6-month extension so that the return is not due until October 15. The rumor that you have a better chance of getting audited if you file an extension is simply not true. In fact, there are several benefits to filing an extension. Let’s take a look at these.
More Choice
If you try to hire a tax pro on April 1, you will have far less choice than if you approach them in June or November. Most good tax pros are swamped from February through April and September through October. Roughly 30 percent of tax pros did not take on new clients this year for various reasons, and many stopped taking new clients during their busiest times.
Hiring a tax pro off season gives you a better choice of the top tax pros who were otherwise too busy. You’ll likely get an appointment sooner, and the tax pro will be less stressed.
More Time
While you still need to make your tax payments by April 15, you will have more time to get your documentation together for the tax pro. Especially if your accounting records are not up-to-date, this gives you more time to find an accountant (or let us do it), so that they can help you get caught up with your books. When documentation is more complete and less rushed, and your books are accurate and current, both you and your tax pro will have a better outcome.
SEP-IRA Contributions
If you are a qualified business owner, you can contribute to your Simplified Employee Pension (SEP) after April 15 and have it count for last year’s taxes, but only if you file an extension. This gives you more time to max it out if cash flow didn’t allow you to do it earlier.
Fewer Errors
Let’s face it: tax pros are human. From February to April, some put in 80 or more hours per week for several weeks. They are trying to get both business and individual returns filed, along with managing their business, dealing with a disorganized and underfunded IRS, handling staffing shortages, and making time for personal lives. Mistakes will be made when staff is “overtaxed.” You are more likely to get a cleaner, comprehensive return completed when the tax pro is not working such long hours.
Final Forms
This year, there are a few forms, namely Schedules K-2 and K-3, that were finalized late by the IRS. There is a trickle-down effect when the IRS publishes late guidance and final forms. The tax software companies need time to update their systems, and tax pros need time to take educational courses on the tax law changes. As of early March, the IRS could not even receive these forms via a normal electronic filing; they had to be attached as a PDF or filed on paper.
The last thing you want to do is file anything on paper, as the IRS is still two years behind on processing paper returns due to the pandemic closures in 2020, old systems, budget tightening, and staffing shortages.
IRS Guidance
The IRS produces guidance all year long. Sometimes it’s to the benefit of the taxpayer and sometimes it’s not. In any case, it tends to clear up issues and ambiguities for filing. Waiting to file can help to avoid having to file amended returns, which can be a costly process.
Filing an Extension
Contrary to conventional rumors, filing an extension can be a good thing. Feel free to reach out to us if you’d like to discuss extending your return.