Reasons to Consider Extending Your Tax Return
Written by Drew Nicol, CPA
Tax season is upon us once again. Many taxpayers have begun closing out year-end books and started gathering documents in order to prepare for the upcoming filing deadlines. This filing season, tax returns for pass-through entities (Partnerships and S-Corporations) are due on March 15 while individuals and C-Corporations have an April 18 due date. The IRS provides an automatic six-month extension for any business or individual that files for an extension. Oftentimes, people see filing for a tax extension to be a hindrance. However, there can be several benefits to extending your returns.
First of all, there are several procedural advantages to filing an extension of time to file. For example, filing an extension provides the ability to correct inadvertent errors that can occur by filing a superseding return by the extended due date. Examples include but are not limited to:
- missed international information returns (that could otherwise be subject to significant penalties);
- missed tax elections (that can have significant negative tax impacts); and
- receipt of corrected or amended information reports from third parties affecting your return.
As for other types of taxpayers, any partnership can modify a tax return whose deadline has not yet passed by simply submitting a superseding return. Partnerships subject to the centralized partnership audit rules ordinarily must submit a filing called an administrative adjustment request (AAR) to revise a previously filed tax return. If necessary modifications can be made before the extended due date, a superseding return is a more efficient option than an AAR.
For self-employed individuals contributing to SEP IRA’s, extending individual returns can provide additional time for making SEP IRA contributions. SEP IRA contributions are required to be made by the filing deadline of an individual return including extensions. This can allow for individuals to claim a deduction for their SEP IRA contributions upon filing their return, while also providing additional time to actually make the contribution to their SEP IRA. In other words, a self-employed individual would have until October 16, 2023 to make an SEP IRA contribution for the 2022 calendar year if their return is extended.
Some tax benefits that expired at the end of 2021 were originally anticipated to be extended by Congress into 2022. However, these tax benefits did not get extended in recent legislation and have currently expired. The possibility of Congress passing tax laws that could retroactively extend these tax benefits into the 2022 tax year still remains, though it is getting slimmer with each passing day. If passed, these tax extenders could cause significant impacts on returns being filed. Filing for an extension allows taxpayers to ensure that any potential actions in Congress have been considered before filing their returns.
Some taxpayers believe that filing an extension increases their audit risk. Audit risk is very low in general based on the audit rates released by the IRS (significantly less than 1% in recent years). The IRS has not, to our knowledge, ever released any statistics on how many audited returns were extended but, based on our years of experience, the extension of a return has no bearing on whether it is audited by the IRS or other taxing authority. By contrast, filing an amended return (as opposed to a superseding return) because of something that was missed at the time of the original filing means that a human at the IRS will be touching your return, the entire return not just the portion being amended, and could, therefore, cause it to be subject to greater scrutiny.
Filing an extension does not necessarily mean that you opt to delay filing a return. If your objective is to file your return by the original due date, and you have provided BMSS with the information to do so on a timely basis, we will strive to complete your returns no later than the original due date. Note that the filing of an extension of time to file your 2022 return does not extend the time for payment of any tax due for 2022. Any tax due for 2022 must be paid no later than the original due date to avoid the assessment by the IRS of interest and the failure-to-pay penalties (generally, 0.5% of the unpaid tax shown on the return, per month, or portion of a month, with a 25% cap).
For all current BMSS clients, we will begin extending your 2022 tax returns on February 10, 2023 in order to take advantage of the benefits extensions offer. If you wish to opt out of having your return extended, please notify your BMSS advisor as soon as possible to inform them of your request . If you have any questions or concerns regarding the extension of your tax returns, please contact your trusted BMSS advisor at 833-CPA-BMSS or visit our website for contact information.