Filing for a tax extension?
-Article by Larry Holmes CPA. USC - Master of Business Taxation.
This is what you need to know:
Filing for an extension is normal. Most high-net-worth taxpayers, those with foreign investments and the self-employed almost always file for an extension on tax returns and submit paperwork to the IRS by October 15th.
Filing for an extension is perfectly legal and does not increase the risk of an audit. Audits are related to the complexity of the return and are not relevant to extensions.
Keep aware of deadlines involved with filing for an extension. Make sure your CPA can reach you so the tax filing process can be kept easy.
Tax day was April 18th. But for many financial and tax advisors, October 15th is tax day all over again.
There are many reasons people apply for tax extensions, but the main one is the sheer complexity of certain returns. High-net-worth individuals generally have diversified investment portfolios and assets. The volume and variety of information that needs to be gathered on these returns make it virtually impossible to file an accurate tax return in April.
Filing a tax extension doesn’t mean you don’t have to pay at all until October. It gives you more time to file, but not more time to pay. If you live in America, you have to pay your tax liability by the April deadline whether you filed for an extension or not.
It is often necessary to file in October to ensure accurate tax returns. For example, if you are involved in 50 plus partnerships and investments, the likelihood of all those partnerships having their documents in perfect order by April are slim to none. Your CPA will use the data available to them from previous returns and predictions to make an educated estimate of your individual tax liability. As the year goes on, the information needed for accurate filing comes to light as your partnerships and investment entities provide documents to the IRS.
Self-employed individuals who also have a set retirement plan can request an extension if they are unable to make the required annual tax contribution before April. If they can’t pay in April, but know they can get the money together within the next 6 months, it makes sense to file for an extension. This way they gain the time they need to plan their contribution and get the deduction for the prior year.
Will you be at a higher risk of an audit if you file for an extension?
The answer is NO.
Tax return complexity is what increases the risk of audit. Complicated returns usually require an extension in order to be done accurately. Because of this, it may look like there is a correlation between extended filing and auditing, but this is a false assumption many have. The fact of extension does not equal increased risk.
There are penalties and allowances for extensions. If you don’t pay a percentage of your tax in April, or if the estimate you claim on your extension request is dishonest, your extension could be disqualified. This can result in having to pay interest on unpaid taxes from April onwards as you are technically filing late.
Most people who have filed for an extension are not the ones preparing their taxes. Typically people who file for extensions are letting tax professionals or CPAs handle their returns. These tax professionals can maximize deductions and track down obscure tax forms you probably have never heard of that will benefit you.
That being said, your CPA can’t do everything without you. You will need to provide information timely fashion in order to file easily by October 15th. It is important that you are aware of your own deadlines so you can provide the necessary documents to your CPA on time. It can be incredibly difficult to handle complex tax returns at the last minute. Your CPA likely has multiple returns they are handling so getting everything to them on time is important. One way to be first on your CPA’s to-do list is to ensure the documents are there to be handled as early as possible.
It is also important to remain available and communicative. Your CPA will have questions and if you are globetrotting without a cellphone or internet access he will be left in the dark. It’s imperative that you remain aware of deadlines and make sure your CPA can reach you around the October 15th deadline. If your CPA can’t get vital information from you, the results can be catastrophic.
The October tax extension is not a privilege reserved for the affluent. It is open to all Americans who need more time to file an accurate tax return. You can take advantage of this deadline as many Americans do, but you need to fully understand the requirements, risks, and rewards for doing so. If you are uncertain about whether or not filing an extension is best for you, consult your CPA. You can always contact us at Holmes & Associates and we will help you.
The popular opinion is that taxes are...well taxing. They don’t have to be. A good CPA, diligent planning and preparation can make for stress-free tax filing.
-Article by Larry Holmes CPA. USC - Master of Business Taxation.
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