This time of year, I often get panicked phone calls. These calls are mostly due to not having the correct information gathered together to have their taxes prepared on time. There is also a fear of the possibility that filing an extension for the tax deadline could cause more problems.
Filing an extension shouldn’t cause fear. The rumors going around that filing an extension is a red flag to audit a return are way exaggerated. In actuality, you have more chance of being audited by owning a business or rental real estate, than from filing an extension.
There are some things you should know before filing an extension though. The first is that the extension only gives you more time to gather the information and file a correct tax return. It DOES NOT extend the time you have to pay the taxes. That means you want to either have a pretty good projection of what you will owe and make a payment accordingly, or pay an amount that you know will put you over and generate a refund. If you have a good reason to believe you’re getting a refund based on what has already been paid, then an additional payment wouldn’t be necessary.
The best way to do this projection is, to give as much information as possible to your tax preparer to allow them to put that information into their tax software and determine if a payment is necessary. This projection can be based off the prior year; however, it is not always accurate enough. But you are not looking for perfection at this point, just enough information to determine if a payment is necessary.
I’ve also worked with people who are just plain determined that they will not file an extension, period. The only way to make sure this doesn’t happen is, to have all your information to your tax preparer within a reasonable time to allow them to ask you clarifying questions. Remember, you are not the only person who waited until the last minute. If you own multiple businesses, or multiple real-estate holdings, the best way to ensure you don’t need to file an extension, is to do your bookkeeping on a monthly basis, so you’re done before the end of January. Don’t expect to be able to sit down one Saturday and get the bookkeeping for your business completed for the entire prior year. I‘ve found that it generally takes one to three hours per month to do all the accounting for a small business. Actually, the time increases by approximately an hour per month when you are doing more than one month at a time. The reason is, that we don’t have perfect memories and trying to figure out who the debit card payment was to, six months ago, can take some research and thought.
Don’t be afraid of filing an extension, however don’t’ let it slide just because you are off the hook for the original April 15th deadline. Make sure to schedule a time you’ll tackle this, and don’t’ let yourself down. Most tax preparers are even busier in September and October because of all the people waiting again, until the last minute. Make sure to give you and your tax preparer time to find all the little details and ensure an accurate return.