How to Avoid Filing an Extension

So you filed an extension?  Well, first of all you’re not alone.  As more tax preparers retire or leave the field, more taxpayers are going on extension due to their new preparers workload.  And as the extension deadline approaches, many taxpayers are still finding themselves scrambling to gather documents to file their returns on time. While filing an extension can give you extra time, it's often better to avoid it altogether. And an extension to file the return is not an extension to pay the taxes due leading to potential interest and penalties. Here are some effective strategies to help you avoid the need for a tax extension.

Retain a copy of your tax returns and documents

Not only is your prior year tax return and the tax documents used to prepare it a helpful guide to remind you what documents you need to give your preparer, but it’s also the law.  A common misconception is that your tax preparer can retain your tax documents for you, but that is not the case.  The IRS requires the taxpayer to retain the last seven years of tax returns and documents in the event of an audit.  And a tax transcript is no substitute for the actual return.

Organize Your Documents Early

One of the most common reasons for needing an extension is missing or disorganized documents. Start gathering your tax-related documents as soon as possible. This includes W-2s, 1099s, receipts, and any other relevant paperwork. Many preparers offer a tax organizer to help their clients in collecting the necessary information to prepare this return.  If they don’t, create a checklist to ensure you have everything you need. Keeping a dedicated folder for tax documents throughout the year can also make this process smoother and you can use that folder to retain the documents after your taxes are filed.

Start Preparing Your Return Well Before the Deadline

Procrastination is a major reason why many taxpayers file for extensions. To avoid this, set aside time well before the tax deadline to begin preparing your return or the documents you need to provide your preparer. Even if you don’t have all your documents, you can start by filling in what you do have and identifying what’s missing. This approach also allows you to handle any complications or questions that arise without the last-minute rush.

Hire a Professional Bookkeeper

Sometimes the reason a client’s return is extended is because there either are no books and the books need a lot of cleanup.  Working with a professional bookkeeper during the year can not only prevent delays on filing your return, but can help you have a good idea of what adjustments you need to make so you won’t have a balance due at the end of the year.  For small business owners, hiring a bookkeeper may seem like an unnecessary expense, but it’s an expense that can save you time and money in the long run.

Consult with a Tax Professional Early

If you have a complex tax situation, consulting with a tax professional early can be a game-changer. A CPA or tax advisor can help identify potential issues and give you advice on what documents you’ll need. Many tax preparers offer tax planning or strategy services where they meet with clients throughout the year.  If you have a complicated tax situation, you should take advantage of these services and meet with your tax advisor regularly.  They can also give you advice on how to adjust your withholding or make estimated tax payments so you won’t owe as much in taxes at the end of the year.

Utilize Tax Software

Tax software can simplify the filing process by guiding you through each step and helping you avoid common mistakes. Many tax software programs allow you to import information directly from your employer or financial institutions, reducing the time needed to enter data manually. If your preparer uses any kind of software or apps, use these to your full advantage.  Most preparers will set the applications up to contain all the important information you need to gather your tax documents, including the deadline you need to turn all your information in to avoid going on extension.  This will save you and your preparer valuable time answering questions.  By starting the process early with tax software, you can quickly identify any missing information and avoid last-minute panic.

Stay Informed About Tax Changes

Tax laws change every year, and these changes can affect your filing process. Stay updated on any new tax laws, credits, or deductions that may apply to your situation. This is also where meeting with your preparer on a regular basis can be helpful because they can sometimes inform you of tax changes that will affect you.  Being aware of these changes ahead of time can prevent surprises and help you plan your tax return more efficiently.

Conclusion

By staying organized, starting early, consulting with professionals, utilizing tax software, and keeping informed about tax changes, you can significantly reduce the chances of needing an extension. Not only will you avoid the stress and potential penalties, but you’ll also be able to enjoy your refund—or plan for any payments—without delay.