The deadline to file your tax return is nearly here, and you’re sweating bullets. Maybe you’re gunning for a valuable deduction, but you need receipts, and they’re buried in the back of your closet somewhere. Or perhaps your employer still hasn’t sent your W-2. You could use an extension, but you’re terrified that the IRS will audit you if you ask for one.
Does filing a tax extension increase your audit risk? Find out below.
Filing a tax extension has absolutely no bearing on whether the Internal Revenue Service chooses to audit you. The IRS encourages filing for an extension if you need more time to gather information for your return. It would rather have a complete and accurate return than one riddled with errors.
So, if you need extra time to file your tax return, you can apply for an extension without fearing an audit.
It’s important to note that filing an extension does not change your payment due date. You must still pay your tax liability by the deadline. If you don’t, you risk late payment and nonpayment penalties, plus interest.
Not paying what you owe is a big trigger for IRS audits, especially if you’ve neglected to pay taxes for several years in a row.
You have a few options if you can’t afford to meet your tax liability right away. You can set up an installment plan with the IRS, allowing you to make small regular payments instead of having to pay a hefty lump sum.
A second option is to file an offer in compromise. Generally, you can’t do this unless you can prove you have no way to meet your tax liability. If your bank account is flush with cash, the IRS probably won’t accept an offer in compromise.
Does filing a tax extension increase your audit risk? No, but you might face an audit if the IRS thinks your tax return doesn’t pass the sniff test for other reasons.
The IRS uses a special system, called the Discriminant Information Function (DIF), to look for profitable audits. DIF selects tax turns for audit based on income, credits, and deductions, among other factors.
Taking deductions you’re not qualified for is a common way to trigger an audit. For example, the IRS scrutinizes returns with charitable, auto mileage, and home office deductions. If you want to claim one of these deductions, you must supply proof that you’re eligible to do so.
If you have non-employment income, expect the IRS to look harder at your return. The IRS carefully analyzes business income, capital gains, interest, dividends, and royalties to look for mistakes.
Business losses are another audit red flag. If you recently started your business and had losses in the first couple of years, that’s generally not a big deal. But if your business is well established and you’ve claimed losses for the past five years or more, the IRS will want to know why.
Does filing a tax extension increase your audit risk? Thankfully, no, so you’re free to file an extension without worry. However, you do risk an audit if you take questionable deductions or underreport your income.
If you’re concerned about a potential IRS audit or any other tax-related issue, contact Levy & Associates at (800) TAX-LEVY for a consultation with a lawyer who can walk you through the legalities.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.