Have you heard someone say this? "Filing an extension will make my return stand out and I will be more likely to be audited." One reason often cited for not filing a tax extension is that it might cause the IRS to look at your return more closely, and it might trigger an audit. But this myth doesn't seem to be true.
The IRS is generally looking for patterns: out of the ordinary deductions and expenses, forms W-2 and 1099 that don't match up, inconsistent income and expense reports, etc. Filing an extension, which is clearly allowed by law, is not a reason for the IRS to flag your return.
In fact, Kelly says, filing an extension might even reduce your chances of audit, because it gives you more time to gather last year's business information to find more deductions and make better decisions.
(In an interesting side note, Kelly's article included a poll, which showed that 45.3% of those responding took the extension.)
William Perez, About.com's Guide to Tax Planning, has a great list of pro's and con's of filing an extension on your business taxes. One big advantage he mentions relates to extensions: taking the extra time can improve the accuracy of your return. William says:
There's an inevitable rush to get tax returns finished by the deadline, and taxpayers and accountants alike can make mistakes when rushing. With an extension, this gives you and your accountant extra time to go over the return and make sure everything is complete before sending in the return.
Important: I feel obligated to remind you that filing an extension doesn't mean you get an extension on payment; you must pay by the tax due date (April 18 in 2011) to avoid fines and penalties.
As usual, I have to note that the decision on whether or not to file an extension is one you should discuss with your tax preparer. Each business is different, and everyone has different goals. But you shouldn't hesitate to file that extension if your only concern is getting audited. The benefits seem to outweigh the negatives, and being audited doesn't seem to be a negative.
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