Don't Fear The Tax Extension

This has been a record setting year for tax preparers in the area. Even though tax laws didn't change that much in 2011, more and more people relied on paid tax preparers (hopefully enrolled professionals) to prepare their returns.

And while firms in this area processed record numbers of returns, they also put record numbers of returns on extension. Horrors! Just the mere mention of the word to some people is the equivalent of saying that you strapped your dog to the roof of the car last time you went on vacation.

Relax. Don't worry. Extensions have gotten a bad name over the years. You've heard the slurs. Extensions are an audit flag. They show you've got things to hide. You pay more. And on and on and on.

So let's dispel the myths. When you really analyze it objectively, not only does filing extensions make sense for many people, it could actually result in a better return in the end.

First, tax extensions are not audit flags. There has never been a study that has shown that you are more likely to be audited if you file an extension. In fact, some writers have claimed that because certain returns selected for audit are chosen from pools of returns filed by the first due date, you may be less likely to be audited if you file an extension. While that may not necessarily be believable, you are far more likely to be audited if you are a high income earner, self employed, or with deductible expenses reported that are outside the norm than if you simply filed an extension.

Extensions mean that for individuals, you get an extra six months to file your return. Period. Paragraph. That's it.

Note that I didn't say more time to pay. There's a reason for that. Extensions don't give you more time to pay taxes that are due. So if you filed an extension for 2011 thinking you now have until October to pay, think again. Taxes are always due on April 15, or the 17th, like this year. The penalty and interest clock are running. If you believe you owe money, get out now and write a "protective" payment and get it to the IRS immediately. It's OK to guess what you owe. Just make it an educated guess. Yes, if you overpay, you'll get a refund. Just do it.

Now think about what happens before the April tax due date. Tax preparers are going crazy. While trying to get as many returns out as possible, they're also interrupted by dozens of phone calls and emails: "Where is my return?" That leads to rushing, which leads to errors and missed deductions.

Consider returns being prepared now while under extension. The preparer has more time to thoughtfully consider all of the options available, scour the return for missed deductions, ask more questions, and isn't being barraged with pressuring phone calls.

Who will have the better outcome?

This is exactly the point. Since extensions aren't audit flags and you won't get into trouble by filing them (and even the late payment penalties aren't that great if you pay promptly), and because you are more likely to get a well-thought-out return prepared by someone not feeling pressure. The advantage actually goes to those who filed their extensions and can wait a couple weeks.

Now if you haven't filed your extension, it's too late to do so now. You're running up penalties for late filing as well as late payment. Get your return done immediately. But for those on extension, relax. You may be in better shape than those who were pressuring their preparers to get their returns filed by April 17.