Filing taxes can be stressful and time-consuming, often leading individuals and businesses to seek tax extensions. While extensions can provide much-needed relief, a common concern that lingers in the minds of many is whether filing for an extension increases the likelihood of facing a tax audit.
Below, we will delve into the relationship between tax extensions and audits, debunking myths, exploring the factors influencing your chances of being audited by tax authorities, and answering the question: Does filing tax extension increase audit risk? Let’s get started!
Does Filing Tax Extension Increase Audit Risk?
The common belief that filing a tax extension automatically increases your audit risk is largely a myth. While there’s no definitive answer as the IRS doesn’t disclose its exact audit selection criteria, several factors suggest filing an extension itself doesn’t trigger an audit:
Filing a tax extension is an effective strategy among numerous taxpayers looking to avoid penalties, and it does not increase the probability of an IRS audit. The IRS encourages filers to use extensions if they need additional time to gather their financial information accurately.
By requesting a tax extension, you inform the IRS that you require additional time to submit your taxes correctly.
As a result, it can act as a strategic move to avoid the scrutiny of a post-tax season audit rush and a strategy to acquire additional time for complete tax preparation. Filing for a tax extension is thus a crucial tool that not only helps you avoid penalties but can also protect you from increased audit risk, meaning it does not increase the audit chances.
Remember, you can file personal tax returns on Beem. It’s an easy online process.
How Does the IRS Decide Who to Audit?
The Internal Revenue Service (IRS) uses various methods to select tax returns for audit. The goal is to ensure compliance with tax laws and maintain the tax system’s integrity.
While the specific criteria used by the IRS are not publicly disclosed, several factors can increase the likelihood of an audit:
- Random Selection: Some returns are chosen purely at random for audit. This is done to maintain a level of unpredictability and to discourage tax evasion.
- Document Matching: The IRS compares the information on your tax return with information reported by employers, banks, and other third parties. If discrepancies are found, an audit may be conducted.
- High-Income Filers: Individuals with high incomes are more likely to be audited. The IRS may focus on high-income taxpayers to ensure they accurately report their income and comply with tax laws.
- Inconsistent Information: If the information on different parts of your tax return is inconsistent, it may raise suspicions. This includes discrepancies between income reported and deductions claimed.
- Prior Audits or Noncompliance: Individuals or businesses that have been audited in the past or have a history of noncompliance may be more likely to face future audits.
It’s important to note that being audited does not necessarily mean doing something wrong. Audits can be triggered for various reasons, and the process is intended to verify the accuracy of the information on your tax return. If you are selected for an audit, you should respond promptly and provide all requested documentation.
What Factors Could Increase the Chances of an IRS Audit After Filing an Extension?
Filing an extension with the IRS provides additional time to submit your tax return. Still, it doesn’t necessarily increase or decrease your chances of being audited.
The factors that may increase the chances of an audit after filing an extension are generally similar to those for regular tax returns. Let’s examine what factors increase IRS audits:
- Accountability Targets and Audit Quotas: Financial experts generally agree that tax season is when IRS agents fulfill their audit quotas. From this point of view, the pressure to meet performance targets or achieve specific compliance goals can indirectly influence audit decisions, increasing the likelihood of an IRS audit after filing an extension.
- Failure to File on Time: While filing an extension gives you more time to submit your return, failing to file by the extended deadline can lead to penalties and potentially increase the likelihood of an audit.
Are there Penalties for Late Filing Even With a Tax Extension?
Remember that requesting an extension does not extend the time until which taxes must be paid. A tax extension gives you additional time to file your tax return but doesn’t grant an extension for paying any taxes owed. So, there can be penalties for late filing even if you’ve been granted a tax extension.
Notifying the IRS is a smart choice if you need help making your tax payments on time. To deal with your debts, they can go over several solutions with you, like a payment plan or an offer in compromise.
The IRS uses an automated algorithm called the Discriminant Information Function (DIF) to determine which tax returns need further investigation.
The DIF system examines several return components for signs of possible mistakes or discrepancies. You shouldn’t worry that your audit risk will grow if you file for a tax extension because it won’t affect the DIF system in any way.
So, does filing tax extension increase audit risk? If you need more time to compile your financial data and prepare your tax return, filing for an extension is a sound and recommended practice that will help you avoid penalties and ensure your return’s timely and accurate submission. Check out Beem Tax Calculator to get a quick and accurate estimate of your federal and state tax refund.