There are two types of questions we often receive: 1) How can I save on taxes? and 2) Does filing an extension increase my chances of being audited? Taxpayers that are considering filing an extension or already did, may want to know what the consequence is for filing an extension, if any.
Why would I need to file an extension?
Taxpayers that need additional time to gather all of their paperwork and to seek professional tax advice may want to consider filing for an extension via Form 4868. Filing an extension gives taxpayers until October 15 to file a return. But, this doesn’t mean that taxpayers have additional time to pay their tax bills. Taxpayers are required to pay their estimated tax liability (or at least 90% of it) by the tax due date, which for this year was April 17th, 2012. Taxpayers that fail to pay 90% of their estimated tax liability by April 17th, will owe 0.5% a month in penalties for the unpaid balance, up to 25% of the balance. Those that qualify may request an extension of time to pay to have late payment penalties waived but that only applies to the unemployed and certain small business owners.
Does filing for an extension increase my chances of being audited?
There are many schools of thought on this, but if we look at the way the IRS review process works, filing for an extension does not in itself increase your chances of being audited. Rather, your adjusted gross income and the types of credits and deductions you take may increase your chances of being audited. But, it still quite low given that the average Joe and Jane Taxpayer earning less than $200,000 a year has a 1 percent chance of being audited.
In case you’re wondering, many taxpayers file for extension. Of the 142 million tax returns processed in 2010, 10.5 million were from those that filed for extension (Source: IRS News, IR-2012-45, April 10, 2012)
Do you have more tax filing questions? Browse answers or ask tax preparation questions online.
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