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Filing an Extension: Myth vs. Fact for IRS Audit Red Flags

A common myth is that filing an extension beyond the April tax filing deadline is a red flag for an IRS audit. Not true. There are legitimate reasons for filing an extension that don’t have an impact on your potential for an audit. Know when and how to file an extension, and understand the true reasons the IRS may want to perform an audit.

Filing an Extension

It’s best to file a tax return once, and not file an amended return. An amended return is more likely to flag IRS attention than an extension. We can file the extension for you, giving you an extra six months before the return is due. Consider the following:

  • Do you need more time to gather all of the information necessary for your most accurate tax return?
  • Filing an extension applies only to the return. If you owe tax, the payment is still due by April 15th to avoid late penalties. We can help you estimate an amount that you may need to pay prior to April 15th.
  • No approval from the IRS is necessary. All extensions are for six months.

Audit Flags

The IRS audits less than 1% of personal tax returns. However, there are certain issues that make people more likely to receive an audit. Below is a list of typical red flags for the IRS:

  • Income in excess of $200,000 makes you more likely to receive an audit, especially if your income is over $1 million.
  • Discrepancy in Form W-2 or Form 1099 between your reporting and the issuer of the form.
  • Small business/self-employed, especially businesses that conduct many cash transactions.
  • High proportion of deductions relative to income, for individuals or businesses. Entertainment, meals and travel are particular targets because deductibility requires specific record keeping (date, amount, location, names of attendees, business purpose and discussion). Claiming 100% business use of a vehicle is also a flag. Keep mileage logs or use a mileage app on a smart phone to ensure accurate records.
  • Charitable deductions that are: higher than expected for your income, related to real estate donations, non-cash donations over $500 that aren’t itemized (Form 8283), or significant donations of property without an appraisal.
  • Real estate rental losses for non-real estate professionals.
  • Discrepancy in reporting between divorced spouses regarding alimony. (Child support is not tax deductible.)
  • Losses related to a hobby. You can deduct expenses only up to the amount of income you receive from the hobby.
  • Early withdrawals from an IRA or 401(k) plan.
  • Lack of reporting gambling winnings for recreational gamblers.
  • Large cash deposits or purchases (in excess of $10,000).

Please contact a Salmon Sims Thomas tax advisor with any questions regarding filing an extension or supplying the proper documentation for your tax return.