Tax Season Considerations: Direct Deposit of Refunds & Extensions

March 3, 2023

The annual tax return filing season is currently in full swing - and now is a good time to review the following important tax season considerations.

Why should you consider a direct deposit of your tax refund?

In recent years - and now more than ever - the IRS has been promoting the benefits of requesting a direct deposit of tax refunds. As indicated in this IRS website article, Get Your Refund Faster, Tell IRS To Direct Deposit Your Refund, 8 out of 10 taxpayers get their refunds by using direct deposit. It is simple, safe and secure. This is the same electronic transfer system used to deposit nearly 98 percent of all Social Security and Veterans Affairs benefits into millions of accounts. And combining direct deposit with electronic filing is the fastest way to receive your refund. There’s no chance of it going uncashed, getting lost, stolen, or destroyed. The IRS issues more than nine out of ten refunds in less than 21 days.

Direct deposit avoids the potential for check fraud

In addition to the obvious benefits explained by the IRS, a recent warning from another government agency, the Financial Crimes Enforcement Network (FinCEN), also supports the direct deposit of tax refunds. 

On February 27, FinCEN reported that “Criminals have been increasingly targeting the U.S. Mail and United States Postal Service mail carriers since the COVID-19 pandemic to commit check fraud.” 

According to FinCEN, Bank Secrecy Act reporting for check fraud has risen substantially in the last three years.

In 2021, financial institutions filed more than 350,000 Suspicious Activity Reports (SARs) to FinCEN to report potential check fraud, a 23% increase from the previous year. That upswing continued into 2022, when the number of SARs related to check fraud topped 680,000.

“Criminals typically steal personal checks, business checks, tax refund checks, and checks related to government assistance programs, such as Social Security payments and unemployment benefits,” FinCEN said in the release.

Therefore, in addition to expediting the receipt of your tax refund, utilizing direct deposit can protect you from financial fraud and the possible theft of your refund.

Tax return extensions – why it sometimes makes sense and FAQs

As we approach the original filing due dates for calendar year 2022 tax returns, and consider the need to file extensions of time to file for some returns, it may be helpful to explain why filing an extension can make sense on occasion - and answer some Frequently Asked Questions regarding tax return extensions. 
Last tax season, we published Filing An Extension May Make Sense For You that helped explain why it often makes sends to extend the due date for filing your tax return.
In addition to the useful information in that article, here are some FAQs regarding tax return extensions that have been provided by the American Institute of CPAs (AICPA):

What does filing an “extension” do?

  •  An extension is a form filed with the IRS to request additional time to file your federal tax return. The extension period is six months, which extends the due date for submitting your individual return to October 16 (for individual returns, the original due date is April 18, 2023, and the extended due date would be October 16, 2023). In many states, filing an extension with the IRS will automatically extend the time to complete a state income tax return, but some states still require a separate extension form.
  • Filing an extension grants you additional time to submit your complete and accurate return, but you still need to estimate whether you will owe any taxes and pay that estimated balance by the original due date.
  • Extending your return allows you and your CPA more time to prepare your tax return to ensure the filing of an accurate tax return. In many cases, you may still be waiting for additional information (e.g., Schedules K-1, corrected Forms 1099, etc.) to complete your return.

Why does my CPA suggest we extend my tax return?

  • If your CPA has recommended that you file an extension, it may be due to many reasons, such as: 
    • The volume of data or complexity of certain transactions (e.g., sale of a rental property) on your return requires additional time.
    • The amount of time remaining in filing season is limited for the CPA to complete client returns by the due date* due to late-arriving information.
  • Many CPAs have a "cutoff" or deadline for clients submitting their tax information so they can plan their workload to ensure all client returns and extensions are completed by the due date.
  • Your CPA may suggest filing an extension if there are aspects of your return affected by pending guidance or legislation.

Am I more likely to be audited if I extend?

  • Extending will NOT increase your likelihood of being audited by the IRS.
  • It is better to file an extension than to file a return that is incomplete, or that you have not had time to carefully review before signing.

What are the primary benefits of extending my tax return?

  • It provides for additional time to file returns without penalty when you are waiting for missing information or tax documents (such as corrected Forms 1099). Remember that an extension provides additional time to file, but no additional time to pay. Penalties and interest may be assessed if sufficient payment is not remitted with the extension.
  • You may qualify for additional retirement planning opportunities or additional time to fund certain types of retirement plans (e.g., SEP IRA).
  • It is often less expensive (and easier) to file an extension rather than rushing and possibly needing to amend your return later.

Should I do anything differently if I am filing an extension or "going on extension?"

  • No, you still should give your CPA whatever information you have as early as possible or as soon as it becomes available.
  • Expect to pay any anticipated taxes owed by the due date. You still need to submit all available tax information to your CPA promptly to be able to determine if a payment may be due with the extension.
  • If you are required to make quarterly estimated tax payments, individual first quarter estimated tax payments are due April 18, the original due date for individual tax returns. Your CPA may recommend you pay the projected balance due for last year and your first quarter estimated tax payment for this year with your extension. This helps reduce the risk of having a balance due when your return is ultimately filed, and any overpayment can be applied to your current year estimated tax.
  • If you are anticipating a large overpayment that you will want refunded, your CPA will likely try to complete your extended return as soon as possible once all tax information is available. Your CPA may also want to discuss tax planning opportunities with you so that, in future years, you don't give the IRS an interest-free loan. If you pay estimated tax payments, you should consider any anticipated overpayment on your current return when calculating quarterly estimates.

Final Thoughts

We hope this article has provided useful information, regarding direct depositing tax refunds and the need for tax extensions, for you to consider as you file or prepare to file your tax returns for 2022.

If you need additional guidance, please reach out to your Herbein team member through the form below.

Article prepared by Barry D. Groebel