by Gregory S. Dowell

August 24, 2017

As due dates approach, some taxpayers refuse to even consider filing an extension, an opinion that is not based on fact, but on fear. The folklore is that filing an extension raises the risk of an audit by the IRS. There is absolutely no statistical evidence to support that opinion, and any professional who has been in the tax preparation business will tell you that there is no anecdotal basis to support that folklore. Filing an extension does not increase audit risk, regardless of whether the taxpayer is an individual, corporation, or partnership.

Conversely, rushing to file a tax return before the original due date without filing an extension may not be in the taxpayer’s best interests. Think about what often happens to taxpayers with more sophisticated returns (or to taxpayers who simply have a difficult time gathering their information): As the original due date nears, the taxpayer realizes that certain key information is either missing or not yet available. In an irrational effort to avoid an extension, the taxpayer will estimate the missing information or omit the missing information from the tax return.

Either action can cause an error that may later trigger additional penalties and interest, or that limits flexibility. In such a case, filing a return with estimates may precipitate the need to file an amended return for the taxpayer, when the missing information is finally received and when it differs materially from the estimate that was used. Importantly, the professional cost of filing an original return, and then filing an amended return, will typically be considerably more than the cost of filing an extension and then filing only one tax return.

Our position at Dowell Group has always been that we prefer to file extensions when there is a strategic need. That strategic need may be due to:

1. Client needs more time to gather accurate information; perhaps key charitable information is missing, or the client has been traveling.
2. Information is missing, perhaps due to late-arriving documentation from 3rd parties (K-1s, cost basis for stocks sold, or 1099 forms, for instance).
3. More time is needed to gain clarity on a key matter (for example, considering the possible need to include distributions from an estate or trust).

Clearly, there are relatively simple returns where the information is available, the clients are organized, there are no 3rd party documentation issues, and there is virtually no benefit to filing an extension. In those cases, we believe it is in the client’s best interests to file the return by the original due date. CPA firms that have good controls begin preparing extensions well in advance of the actual due date and never on the due date. For instance, in consideration of the April 15th due date, a CPA firm might begin to prepare extensions on April 10th. The reason for this is two-fold: 1) the CPA firm is dealing with a volume of client returns, and it simply takes time for its personnel, its computer systems, and the governmental bodies to process those extensions, and 2) the CPA firm needs to insure by a system of cross-checking and controls, that all necessary extensions were filed for its clients, a matter that can not be done at the last minute. Because of the processing time for extensions, as a practical matter, a client should expect that any return that is not in final form a week before the due date will probably be extended.