The other day I received a call from a client who was quite nervous. During these turbulent times in the market it’s not unusual to talk with clients who are uneasy about the current market conditions. However, this call didn’t deal with the market; rather, it dealt with his tax situation. Since the client retired about seven years ago, he and his wife spend from mid-March to early June in Arizona. What made the client nervous is the fact that he typically has his tax return done and filed before he leaves; however, that is not the case now.
As the client informed me, he is leaving next week and he still does not have all his information. As a result, he cannot complete his tax return and that is what’s causing him his problem. I suggested that all he would need to do was to file for an extension. I think when I mentioned the word extension he even got more concerned.
There is a myth that if you file for an extension it will open you up to more IRS scrutiny. For as long as I’ve been in the business I’ve heard that urban legend. It is not true. As I explained to the client, there is no evidence whatsoever that filing for an extension increases your audit risk. What I told him that would increase his audit risk is to file an incorrect return. After having a discussion with the client, he agreed that filing for an extension would be the most appropriate course of action.
Filing for an extension to complete your tax return is not difficult and you would be surprised how many people do it. There are lots of reasons why people cannot complete their return by April 15th (or this year, April 18th). It could be that you don’t have all the necessary information to complete your return, you’re going to be out of the country or plain and simple, you’re too lazy to file the return by the deadline. The bottom line is extensions are automatic and you don’t need a reason. By filing IRS Form 4868, you receive an automatic six-month extension to file your return. It is automatic and thus, you don’t have to worry about obtaining approval. As long as you file the form, you get the extension.
What confuses people about extensions is that it is not an extension of time to pay your taxes but rather, to file your return. As a result, as I recommended to the client that he guesstimate the missing information to determine whether money will be owed or he will receive a refund. If you’re receiving a refund all you need to do is file the extension form-that’s it. On the other hand, if you find that you are going to owe money, then you can make an estimated payment with your extension.
We still have a month before taxes are due and therefore there is still plenty of time for people to complete their return. However, if you can’t, don’t panic. As I said earlier, filing an extension will not increase your audit risk. What increases audit risks are inaccurate and sloppy returns. Therefore, it is much better for you to take your time and complete your return accurately than it is to rush at the last minute and file an inaccurate return.
Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.