Is Filing Extension Bad For You?
Most people HATE filing taxes and when it comes to tax time, just even gathering information can sometimes be challenging. When the deadline approaches, many wonder should they file an extension? Is it a bad thing to file an extension? Is it a crime to file extension? Does it mean that you FAIL your life if you have to file extension? Stay tuned and I will give you the real answer.
The real answer is filing an extension can give you more time to prepare your tax return accurately. Sometimes, filing an extension could also mean more deductions in the event that you are saving up to fund certain retirement accounts especially if you are self-employed.
Filing an extension is a STRATEGY. Let me explain why…
If you are an S-corp, filing extension for your S corp allows you to make sure you have sufficient time to CAPTURE all your deductions and avoid giving FREE money away.
On March 1, 2023, IRS reminded taxpayers of their tax obligations to report income from the gig economy and service industry, transactions from digital assets, and foreign sources or holding certain foreign assets. Let me just say this to you, if IRS is reminding you to not forget to report ALL your income, it is even more IMPORTANT for you to claim ALL the deductions or credits you have.
Your 1040 or personal tax position remains open as long as your business tax return has not been finalized. That’s why it is very common for most CPAs to finalize a client’s business tax return together with the client’s personal tax return and not RUSH to file each of them independently.
Some taxpayers perceive filing extension as a negative action and they rush to meet the deadline. Often time that is not wise especially under the circumstances that a new tax law change has just been introduced.
On Feb 22 2023, The IRS Newsroom reminds taxpayers to WAIT to file until they receive all their proper tax documents, or they risk making a mistake that could cause delays if you have a refund. Example, if you sell stocks during the year and receive investment income, it is wise to wait a little until you have your complete 1099-B or 1099 brokerage statements. Sometimes, you may have received your brokerage statements and 2 months later, you receive another corrected statement. This is common with investment companies and if you rush to file, you may end up having to amend your tax return, which may potentially increase the IRS audit red flag.
IRS further emphasized that taxpayers should also review their documents carefully. If any of the information is inaccurate or missing, taxpayers should reach out to the issuer (including your employer, your investment firm or your customer) right away for a correction.
It is not uncommon that taxpayer forgot to report certain income. Example, someone has three W2s but they forgot to report the 3rd W2 when they file their tax return. To avoid this mistake, one should consider logging into the IRS website to obtain an account transcript, payment records, tax records and more. Your income and wage transcript provided by the IRS will give you the details of all your earnings to validate against your tax return prepared. The problem is it is pointless for you to retrieve this transcript until some time in June or July, which is another reason why an extension is not a BAD decision, if your goal is to submit the MOST accurate tax return so that you stay out of trouble with the IRS.
To sum up, if you RUSH to file your business and your personal tax return, the following may happen to you:
1) YOU MAY LOSE DEDUCTIONS!
2) YOU MAY OVERPAY IN TAXES!
3) YOU MAY INCREASE IRS AUDIT RISKS!
The best approach is to pay by April 15 and file by Oct 15. Taxpayers need to remember that just because you file an extension, it does not mean IRS is giving you extra time to PAY. Taxpayers should know that an extension to file is not an extension to pay. Hence, if you plan to file extension, please remember to make an extension payment by April 15.