Filing An Extension Is Good For Business

The Pros and Cons of Filing an Extension

The IRS does not give bonus points, send extra refunds or audit less returns that are filed early. In fact, the only differentiator the IRS gives to filed returns is an originally filed return or an amended return. Studies of audited returns show that there is no additional risks of audit from an extended return but amended returns ARE more scrutinized by the IRS.

Now that you know filing an extension will NOT cause the IRS to audit your return, here are some Pros and Cons of filing an extension:

Pro: You will have more time to have the return prepared and this will enable you and your CPA to ensure that all the required information has been gathered, analyzed and that the most advantageous tax saving decisions are made.

Con: You will have more time to procrastinate and not get organized.

Pro: You expand your time to amend the return in the future. The IRS grants you three years from the filing date of the return to fix any errors or amend for retroactive tax changes so by filing the return on extension, you expand that window of time.

Con: You have to pay your tax due (or an estimate of your tax due) by April 15th. The extension is ONLY an extension to file and not an extension to pay.

Pro: You will avoid late filing fees, which can add up fast. The failure to file penalty ranges from the minimum of $435 to a maximum of 25% of your unpaid tax due. You must file an extension by April 15th to avoid this penalty if you have tax due.

Con: Your refund will be delayed until the return has been filed. This is another good reason to do tax planning throughout the year to avoid large refunds.

Pro: You get more time to contribute to retirement account options like a Profit Share and/or Cash Balance plan. Those options can save you significant taxes and the contributions for the prior year must be made before the return is filed (even upon extension).

Con: No more than I can think of.

Biggest Pro: You will be able to react to retroactive changes in the tax law without filing an amended return. If Congress passes a tax law that goes back into the year being filed (this happens more often than you realize), you can make adjustments to that tax law change without having to amend your return or lose out on potential tax savings.

Since each taxpayer is different, each extension decision is unique but we highly encourage our clients to consider an extension to ensure long term tax optimization.

If you are interested in whether a tax extension might be the right decision for you and your practice, please schedule a consultation with JNG Advisors today.