Why would anyone who knows all the facts ever want to file their individual income tax return (form 1040) or their business tax return (usually form 1065) before April 15^th?   There are no "good" reasons, really. 

Filing an extension gives the taxpayer time to review, time to think over tax positions, and time for him and his tax preparer to go though the work without being rushed and possibly being more distracted than would be the case a couple months later.


Of course, as with anything else, there are pros and cons:
 

First let's get the pros (the "not so good" [unfortunate] reasons) out of the way:

• Some people dislike taxes so much that they just want to get it out of the way.  They do not want to consider any more tax planning than is absolutely necessary or think about any optional strategies that could be handled better after the April "rush."
   
• If the taxpayer was unable to plan properly, for example if there was an unexpected drop in taxable income, and therefore a sizeable refund of a an income tax overpayment is due.
   
• Worse, are taxpayers who look for large refunds year-after-year and then they take a short-term advance called a "refund anticipation loan" (RAL) and pay an exorbitant rate of return to the lender for the privilege of getting  their own overpaid money back.
   
• The taxpayer is ill and might be unable to file the tax return later on in the year due to his death or other grave situation.
   
• Taxpayer might have a large Net Operating Loss (NOL) and the sooner the tax return is filed, the sooner the NOL can be carried back.

There are plenty of reasons not to file on April 15^th

• Speaking of NOLs - the odds of an IRS inquiry over a complicated tax return and a quick filing of form 1045 or 1040X seeking a large refund is far greater so early in the year when the IRS knows that most competent tax advisors are very busy doing a rush of tax work and filing extensions for their clients.
   
• For any newly passed annual tax return provisions, the IRS is sometimes still working on fixing some of the bugs until after March or April.
      Example: For 2011 IRS is not even accepting anything but very basic "W-2 & standard deduction" tax returns until half-way through the pre-extension filing season, because they need to bring their internal systems up to cover the substantial number of last minute changes Congress passed in December 2010.
      Example: In 2010 a Haiti earthquake relief deduction was retroactively passed into law, necessitating some early-bird taxpayers to file amended 2009 tax returns.
      Example: In late 2009 a new home-buyer tax credit was passed allowing it to be claimed retroactively on 2008 tax returns.
   
• The IRS makes their audit selections based on numerous scans of the tax return data throughout the year.  The sooner a taxpayer's return is filed, the more scans that will pass through the numbers on that tax return, thereby increasing the exposure for being pulled out for a closer IRS review.
   
• When selected for an audit, the IRS will often look at all of the available open tax years that have been filed. If you have already filed the most recent year return, even if it has not yet been processed by the IRS, they can review that year along with the older year that was selected for the examination.  But if you are able to tell the IRS agent, "sorry an extension was filed because the tax return is not completed yet" - then the audit can be ended without expanding the examination to include the most recent tax year.
   
• When filing on April 15^th, the taxpayer makes various irrevocable tax elections, by default.  By filing an automatic extension request, most of these elections are deferred until later.  Every year we hear about taxpayers who filed early, only to find that their circumstances have changed after April 15^th - and if the tax return was not put on extension, it is too late:
   
  • such as - married filing a joint return is an irrevocable election.  After April 15^th this may not (cannot) be changed (or amended) to married filing separate.  Too often it is learned only after it is too late that some tax benefit available as a married separate filer has been lost. Had the taxpayers gone on extension, more time would have been available to decide if they wanted to file Jointly or Separately, because the irrevocable election to file jointly would not have been made until after April 15^th - not being made until later, when the tax return is filed.
     
  • example of a taxpayer situation that could have benefitted by going on extension; to file after April 15^th:
    On May 8, 2008 the IRS issued Economic Stimulus Payment FAQs: Taxpayer Identification Numbers    "I have an ITIN, but my spouse has a valid Social Security number. Can we get a stimulus payment?"    "If you and your spouse file a joint return, you will not get a stimulus payment. If your spouse files a separate return, your spouse may qualify for a payment, based on his or her income deductions and credits."
     
• Once a special irrevocable election to carry forward a Net Operating Loss (or to carry it back) is made, it is too late to change your mind later on in the year when subsequent events might favor making the opposite election.
   
• Retirement plan contributions must be determined in amount by April 15^th and actually paid no later than April 15^th  unless an extension is filed; in which case both the determination of the amount and the payment are deferred until as late as October 15^th
  • IRAs are an exception to this rule, they must be funded by April 15^th
     
• Changing your mind about the amount already contributed to a retirement plan - for example, due to a turn in the market, a change in your personal finances, or any number of other reasons, generally is allowed without penalty only until April 15^th unless an extension is filed.
   
• Any extra tax deduction for expenses paid under the 8½ month "recurring item" rule, Regs 1.461-5(b)(1)(i)  almost by definition can't be determined until as late as September 15^th
   
• Trying to "get it done" April 15^th is a disadvantage compared to working on it and thinking it over, strategizing and reworking the numbers as necessary over the summer months.
   
• Bank 1099-INT forms and small W-2s sometimes get overlooked or are mis-delivered by the US Mail, only to be located later, during the summer months.
   
• Brokerage 1099s are sometimes mailed late or are modified late in March, even sometimes after April 15^th
   
• Partnership K-1s   s-corp K-1's   LLC K-1's   and Fiduciary K-1's  are sometimes delayed or show up as a "surprise" later in the year or they are so complicated that it is better to handle them during the slower summer months when they can be reviewed carefully without other distractions.
   
• For taxpayers who cannot afford to pay their tax bill when due, the extension request often keeps the IRS at bay, thereby giving the taxpayer more "breathing room."
   
  • Note that any taxes due should be paid by April 15^th and the first "quarterly installment" for the following year is also due at the time the extension request is made.
     
  • When there is a possibility that taxes will be due, then the tax return can be roughed-in prior to April in order to determine an appropriate amount to pay with the extension.
     
  • When filing the extension, it is often a good idea to pay a sufficient amount that will result in an overpayment which in turn will be elected to be applied to the following year.  This overpayment then takes care of the first "quarterly installment" for the following year.
    • This "trick" gives the taxpayer various strategy plays that can be determined after seeing events that occur after April, and before the tax return is filed.
       
  • This election to apply an overpayment is not always the best idea for anyone who could become a delinquent tax filer.  When filing more than three years late, the overpayments often are forfeited without limitation, as a late-filer penalty.

• The IRS expects to see large and complicated tax returns filed closer to October, when the taxpayer's CPA has had ample time to review the numbers with the taxpayer and is more likely to file a complete and accurate return.  Large or complicated returns filed by April, especially if they are requesting an overpayment to be refunded,  makes the IRS suspicious and therefore flags the return for possible review or analysis.
   
  • As an example of what can happen if suspicions are raised - in 2008 New York governor, Eliot Spitzer was being secretly observed by U.S. Treasury agents after the movement of cash raised suspicions of possible unreported income.  This eventually led to an unexpected discovery of an activity that had nothing at all to do with his tax returns, but the investigation resulted in him resigning from office.
     
• Brochure explaining going on extension, click here (2 page PDF) to read.
   

Missed the extended due date?  Why it can be beneficial to file delinquently

Colin M. Cody, CPA, CMA
TraderStatus.com LLC
6004 Main Street
Trumbull, Connecticut 06611-2400

(203) 268-7000



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