Does Filing for an Extension on Taxes Flag an Audit?
Every year, millions of people take advantage of the six-month automatic extension that the Internal Revenue Service offers. The extension just gives you more time to file your tax return, and it isn't one of the factors that can flag you for an audit. Given the benefits that an extension offers, you may want to know more about it before passing it up out of fear of an audit.
Audit Red Flags
The IRS provides information about the issues that commonly flag taxpayers for audit. In general, the IRS initially uses software that compares your return against “norms,” or averages, that are based on actual return data -- not on whether you obtained an extension. If your return happens to get flagged, it's then reviewed by an IRS auditor who either recommends an audit or accepts the return as filed. The fact that a two-step process exists requiring a human to actually look at your return before an audit occurs -- rather than relying exclusively on computer software -- may help to put your mind at ease about filing for an extension.
Form 4868 Requirements
One way to obtain the automatic extension is to mail or e-file Form 4868 -- a short nine-line form -- by the original April 15 tax return filing deadline. The form requires some basic information, such as your name, address and Social Security number. It also requires an estimate of your tax liability, despite your not filing a return yet. You can come up with a reasonable estimate by adding together all of the income you earned during the year and subtracting from it all deductions and exemptions you anticipate reporting on the return. Using the tax rates in effect for the year, you can estimate the tax you owe. If you made estimated tax payments, had money withheld by your employer, or know which tax credits you can take, subtract them from your tax liability to arrive at the balance due that must be reported on the form.
Credit Card Payments
You may want to pay the balance due when filing Form 4868, although it's not required to obtain the s-month extension. If you make a tax payment online or over the phone with a debit or credit card, or through the Electronic Federal Tax Payment System, it's not necessary to file Form 4868; you automatically get the extension if the tax payment is made by the April 15 deadline.
An obvious benefit of the extension is that you don't have to rush to get your return filed by the original deadline, which could lead to errors that end up flagging you for an audit. Another principal benefit is avoidance of the late-filing penalty that can increase your tax bill up to 25 percent at the rate of 5 percent each month the return is late. Extensions only give you more time to file, so if you owe tax but wait until after April 15 to pay it off, you can still get hit with a different penalty for paying late.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.