Is Filing For Extension an “Invitation” For Tax Audit?

It’s April 15 and you don’t have W-2, or you are yet to receive Form 1099. What to do then? Many people feel that IRS will not notice such a small deficiency and they proceed to file the return. Not a good idea. You may be paying penalties as soon as the IRS will notice.

There is no need to worry in such a situation. There is an easy short term fix. Go for an extension. It’s easy. It’s legal. And most important, it does not initiate tax audit!

There is a simple form which allows you to apply for a six month extension to file your tax return. It’s called Form 4868 and it is very easy to fill in. You can do it on your own; there is no need to take even the help of an accountant.

The Form asks you basic details – your name, address and social security number. It also asks you to estimate the tax liability and in case any balance is due you are required to send it along with the Form. By making this payment if you are discharging 90% of your tax liability, then there is no worry at all. You are not subject to a late payment penalty or a late filing fee even.

The Form is available very easily. Either you can take it from one of the IRS offices or you can order it by dialing the number 800-TAX-FROM (800-829-3676). At the time of filing the Form you will need information about your income tax return.

You can file this Form online. On filing this Form you will get an acknowledgement.

You must see that you file this form before the due date of your return. You will get automatic extension. And most important thing is you need not give IRS indeed any reason for filing an extension. So even if you’re lazy or you don’t want to think about filing that can be a valid reason for you! 

Form 4868 will give you time up to October 15 to prepare and send your return. And mind well, this extension application is not for the payment of money! You must pay your money before April 15 if you think that is due to the government.

And one more important thing, you can ask extension only once. No more extensions thereafter. You must file before October 15.

The consequences of not filing an extension are worst

If you are unable to file for an extension, it can hurt you. The IRS can slap a late filing penalty which is five per cent per month of the tax unpaid by the due date. And on the top of this there is a penalty for paying late.

The late payment penalty may be waived if you can show a reasonable cause for nonpayment. If 90 per cent of your actual tax liability is paid before the due date and you may be considered to have a reasonable cause. In any case you will be required to pay interest on the tax which is unpaid by the due date. This interest will continue until you pay the tax. Even if you say that you have a very good reason for non-payment, still this interest is charged and recovered by the IRS.

Then there is one statute of limitation. It limits the power of IRS to audit your return. It gives the IRS three years. So for filing the return for 2006 which is due on or before April 15, 2007, the limitation date is April 15 to 1010. If IRS is unable to audit you within this period, then it is prohibited from challenging the deductions you claimed. The only cause for taking action beyond this date is if the IRS is successful in proving that you have committed a fraud. But then the burden of proof lies always on IRS. It must prove that you had the intention to cheat. 

If you file an extension application then the statute of limitations begins from the actual filing date of the return and not from the date of filing the extension.

If you are abroad

If you are a citizen of U.S. or a resident and you’re out of the country on the due date for filing the return, you’ll get automatic extension of two months for filing your return. You need not file Form 4868. 

So remember that filing an extension is normal and does not initiate tax audit.

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