When Congress established the April 15 tax deadline back in 1955, the tax code was exponentially smaller and less complex. Forms were simple and often just a page or two long. Today, a “simple” return can be 50+ pages with schedules and documentation.
And lately Congress likes to work on tax bills that have major impacts during tax season.
Which is why many, if not most, accounting and tax firms file automatic extensions on behalf of their clients every year. It’s like a safety net – we may or may not need it, but it’s nice to have.
Some taxpayers get stressed about the idea of “missing” the deadline, but I’m here to tell you that it’s no big deal. The IRS doesn’t actually care if you file on time or not, just as long as by the deadline you:
- Pay your income tax liability
- File an automatically approved extension, which extends returns an entire six months
Common tax extension myths busted
An extension doesn’t make you late. The IRS actually encourages extensions; in fact, they “automatically” grant it with a simple application. They get just as backed up on their side as tax preparers do, and as long as the estimated payments are rolling in they can process the returns in a less compressed timeframe.
An extension doesn’t increase your chance of audit. This is often circulated on social media and has no basis behind it. In fact, a less rushed return is less likely to trigger an audit.
An extension doesn’t mean your preparer is going to sit on your return for six months. We want them out the door as much as you do so we can move on to the fun stuff: fall tax planning and strategy!
How tax return extensions benefit you
Here’s a little secret: Many, if not most, sophisticated taxpayers extend their returns. Why? It’s a win-win when we can jointly spend more time on the return without rushing, and take the time to have critical conversations when not buried in deadlines.
Other reasons include waiting on K-1s from complex business returns that take time to get out the door, making sure you have all your required information and giving your accountant proper time to work on it, or to buy time to make certain decisions/elections (but that’s getting into the tax weeds).
That’s not to say we have to drag it out for the entire six months’ extension deadline. It’s to say that we’re all just giving ourselves some breathing room. It’s like when you were only going to have 15 minutes between flights and were poised to skip the restroom and sprint to your next gate, and then you found out you had an extra hour. Whew! Now you get a bathroom break and time for a quick bite of dinner to boot.
How tax return extensions help accountants
Tax season is a pressure cooker, and the latest generation of professionals is quite simply opting out. The current and impending accountant shortage is widely documented, with more than 300,000 accountants opting out of the profession between 2019 and 2021.
It’s a profession that requires deep skill, extreme attention to detail, a thirst for continuous learning (the IRS and state taxing authorities change rules the way most people change their underwear), the ability to work with clients who all literally want the same thing at the same time, manage your time incredibly productively during a very compressed tax season, handle reams of digital and actual paper with all manner of documentation, chase clients down for more paper and more answers, have clients get annoyed because of all the questions (which is required by the IRS, not because we love to bug you), and the rush to file and explain what you’ve done and take a breath and then keep going because a bunch of returns got extended and there’s much more work to be done.
And, as I posted on LinkedIn recently, accountants aren’t exactly at the top of the Christmas card list for most people. It’s a reminder of things like paying taxes, digging out paperwork, answering hard questions, and all the compliance work that’s both annoying and sometimes intimidating because you don’t really understand it and are afraid to get in trouble.
Most preparers complete dozens to hundreds of returns, depending on the complexity, working madly to process documents, prepare, review, file, answer questions, working long nights and weekends…it’s like an entire season sprinting a marathon and not stopping for water.
Yet, when I talk to my team and to other tax accountants, it’s obvious that they’re in it for the love of it. I’ve heard tax professionals describe it as putting a puzzle together, playing the tax game for clients, and the ultimate opportunity to sharpen one’s skillset.
So you have a dwindling group of people doing thankless work for the love of it, and it seems like a no-brainer to give them some breathing room, time to ensure the work is of the highest quality and has covered all the bases, and perhaps a little work life balance.
Pay Up: An Important Reminder about Income Tax Extensions
Filing an extension means you have more time to file, but not more time to pay. The government wants their money regardless of whether your paperwork is together.
We do fall planning and projections, including quarterly estimates, for most of our tax clients, which makes it easy to make estimated payments with confidence.
For those who feel like they’re guessing, a good rule of thumb is to pay the “safe harbor” amount, which is a total of 100% (under $150,000 adjusted gross income) or 110% (over $150,000 adjusted gross income) of the prior year’s tax liability.
You can subtract what’s already been paid through quarterly estimates and/or W-2 withholdings to calculate the amount.
Play the Tax Game
To recap, “extension” is not a dirty word, but rather an opportunity to make sure the work is done well. An artificial deadline set when tax returns were an easy-peasy page or two simply doesn’t apply to today’s complex tax work and the skill set required to do it right.
So when your practitioner extends your return so he or she can go home to their family at 9 p.m. instead of midnight during tax season, play the long game. It’s worth it in the long run.
