This year taxes are not due until July 15, but should you extend?

Everyone knows that tax returns are due April 15 most years. In California, that means both the IRS and the FTB. But 2020 has hardly been a normal year. The IRS moved the big April 15 tax filing deadline to July 15, and so did California, but that will be here before you know it. There was widespread speculation that the IRS would extend the July 15 deadline further, maybe until August, but the IRS commissioner confirmed that is not in the cards.

Instead of rushing to file your taxes, should you go on extension to Oct. 15? For many, I say yes. It is automatic on request, and incredibly easy to do. But should you take advantage of the extra time? It is tempting to succumb to the allure of the extra months, but there are those nagging questions. If you extend, do you increase your odds of audit? Conversely, maybe you actually decrease your audit odds, or are they the same?

For most people, few deadlines are more dreaded than the annual rush to file. Many people do not want to put off that deadline, since getting past it can seem like such a watershed event every year. In fact, some people may even feel guilty if they take advantage of that tempting automatic six-month reprieve. There's no shame in an extension. Millions of them are processed every year.

Everyone can automatically get until October 15 by filing (electronically or by mail) a tiny form. It doesn't even require a signature. It couldn't be easier. Of course, the extension is to file your tax return, it is not an extension of time to pay. Thus, you need to pay -- normally by April 15, but this year by July 15 -- what you expect to owe when you actually file your taxes later in the year, anytime up until Oct. 15. But are there good reasons to take the extension? You bet.

Do you have all the forms you need, such as K-1s from all partnerships and LLCs? They have an annoying habit of showing up late, and they are often amended. That can be a big reason to extend. Also, going on extension encourages reflection. Many returns filed right at the deadline are filed in haste, some carelessly. That will probably be true in July, maybe even more so than the usual April 15 date. And that can bring on an audit.

Extensions can allow time to gather records, consider reporting alternatives, and get professional advice. After all, tax returns must be signed and filed under penalties of perjury. It is best to file accurately so you don't have to amend later. Amended returns often come about because people are in a rush. Amending a return isn't necessarily bad, of course. There are times you may want or need to amend your return. But try to use amended returns sparingly.

For one thing, amended returns are much more likely to be scrutinized. File once correctly so you do not need to do it again. Besides, the IRS doesn't even have to approve the extension. It is automatic, and there is no discretion involved. You automatically get the extra six months, period. Extensions used to be four months, with two additional months only if you had a good reason. But now, automatic extensions are for a full six months. Of course, this year is different, since everyone got an automatic reprieve until July 15.

You may not need all the time between July 15 and Oct. 15. Once you extend, you can file whenever you would like one or before Oct. 15. That time comes in useful in other ways too. Going on extension also allows for corrected Forms 1099 and K-1. You may be waiting for Forms K-1, gathering documents or seeking professional advice. Time is on your side with an extension.

If there are debatable points on your return, such as whether a litigation recovery is taxable, or might be ordinary income or capital gain, take the time to get some professional advice. Besides, even if you have all your forms ready, what if you receive a Form K-1 or 1099 after you file? It happens a lot, and the earlier you file your return, the greater the risk you will receive corrected forms that may make you need to amend.

Going on extension makes it less likely that you will be surprised by a tardy corrected Form K-1 or 1099. You may as well file once and file correctly. And then there are all the stories about audit risk. Some people say that going on extension increases audit risk, while some people say the opposite. There appears to be no hard evidence to prove either theory.

However, it is worth stressing that there is no evidence that there is an increased audit risk if you go on extension. In fact, on the contrary, given all the advantages of an extension, one can argue that an extension can actually help reduce your audit risk. All taxpayers worry about IRS audit risk. Opinions vary, and there are many old wives tales about what triggers an audit. However, it is unlikely that going on extension increases IRS audit risk.

The IRS releases data about audit rates based on income levels and types of tax returns. The IRS does not release data about whether going on extension increases or decreases your chances. I still say extensions encourage reflection and care, and that alone reduces audit risk. So, going on extension if you need the time can just make sense. To extend, you can submit a Form 4868, ask your tax return preparer, use commercial software, or do it yourself electronically. For more guidance, check out IRS tax topic 304, covering extensions of time to file your tax return. 