Tax Day Was Extended to May 17, Extend to October to Cut Audit Risk?

Remember last year? The normal April 15 deadline last year was extended to July 15. That brought millions of taxpayers some relief in that very strange year. This year is still plenty strange, but on repeated occasions, the IRS Commissioner said there would be no extension this year. However, in the end, the IRS announced that the April 15 due date is now May 17.

You don't have to request the extension, it is automatic, and it applies not only to filing your tax return, but tax payments too. Individual taxpayers can postpone federal income tax payments for 2020 to May 17, 2021, without penalties and interest, regardless of the amount owed. Penalties and interest will begin to accrue on unpaid balances as of May 17, 2021. Notably, this relief does not apply to estimated tax payments that are due on April 15, 2021.

Thus, these payments are still due on April 15. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly by people whose income isn't subject to tax withholding. Most taxpayers automatically have their taxes withheld from their paychecks and submitted to the IRS by their employer, but estimated tax obligations apply to most everything else.

Of course, many people won't be ready to file by May 17 either. However, you can now make the decision later whether to file on time (by May 17) or to extend until October. Apart from the pandemic, there are some new law changes and many other reasons that have caused this tax filing season -- like last year -- to be difficult.

But if you are able, should you rush to file your taxes by May 17, or should you go on extension to October 15? Like last year, stimulus payments may be worth considering too as part of your timing decision. If you extend, it is automatic on request, and incredibly easy to do. Many people don't have a choice. You just need more time, and one reason might be waiting for all those annoying K-1s to roll in. But if you could somehow manage to file on time, it's surprising how many people ask themselves whether they should take advantage of the extra time.

One common question is if you extend, do you increase your odds of audit? There are a surprising number of people who seem to think that you do. Conversely, maybe you actually decrease your audit odds, or are they the same? There's no shame in an extension. Millions of them are processed every year. That was even true last year, when the July 15 date rolled around.

But this year, May 17 is still pretty soon, and extending often makes sense. 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 by May 17 what you expect to owe when you actually file your taxes later in the year, anytime up until October 15. But are there good reasons to take the extension? You bet.

Perhaps the best reason to extend is that going on extension encourages reflection and due care. After all, all tax returns must be signed and filed under penalties of perjury. That's nothing to take lightly. Many tax returns filed right at the deadline are filed in haste, some carelessly. And that can bring on an audit.

Extensions can allow time to gather records, consider reporting alternatives, and get professional advice. 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 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.

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. You may not need all that time, and once you extend, you can file whenever you would like between May 17 and October 15. That time comes in useful in other ways too. For example, 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 ordinary income or capital gain -- or even whether it is income at all -- 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 cause you to need to amend your return. 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.

Of course, all taxpayers worry about IRS audit risk, and there are many 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.

On the contrary, given all the advantages of an extension, I believe that an extension can actually help reduce your 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. But 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. There's also plenty of good information about extensions on the IRS website, www.IRS.gov. 