A modern ritual

guest commentary by David Potts

It’s that ritualistic time of year again. Many people would prefer a colonoscopy than participate in the annual filing of their income tax return. But deadlines are looming. For individuals, estates, trusts, and partnerships, the initial filing deadline this year is April 18. If you own a corporation with a calendar year end the deadline is Tuesday, March 15.

What do you do if you’re still not ready?

Extend.

The Internal Revenue Service makes filing for an extension of time to file your income tax return painless. An extension request is simply a one-page form that you file with the Internal Revenue Service and all you have to include on the extension form is your name, mailing address, Social Security number or taxpayer identification number, an estimate of the income tax liability (if any) for 2010, and the amount of income tax you’ve already paid for 2010.

The extended deadline is automatic and you don’t even have to sign the form. However keep this in mind. The IRS grants you an extension of time to file your income tax return forms. It is not an extension of time to pay your income tax. Failure to pay your income tax due by April 18 will result in interest and late pay penalties.

There are a lot of people who are afraid of the IRS. This fear makes them nervous and jumpy when you suggest they file an extension and allow themselves additional time to organize their information or take time to find misplaced information. Their biggest fear is that filing their income tax return after April 18 is a "red flag" and increases their chances of an income tax audit. This isn’t true. According to the Internal Revenue Service asking for an extension of time to file your income tax return doesn’t change your odds of being audited — at least that’s the official line. Folklore has it that filing your income tax return at the bitter end, Oct. 15, might decrease your chances of being audited by the IRS.

Now remember, I said this is folklore — unsubstantiated. However, over the years I’ve had this discussion with several IRS auditors. When asked if filing a return in October would decrease the odds of the return being examined, these particular auditor’s answers ranged from "yes, probably" to "possibly" to "I don’t know."

The "yes, probably" auditor’s reasoning went like this. The income tax returns filed in February and selected to be audited were the first returns to be assigned to the field and an auditor’s work inventory while the income tax returns filed in October were, as you would expect, the last returns to be assigned to an auditor. Due to time limitations and work load, an auditor may not be able to audit every income tax return assigned him. As a result, the income tax returns filed in October, the last returns to be selected for audit and sent to the field, might have to go unexamined due to the auditor’s lack of time. The auditor would usually perform a "sight review” and only open the most egregious returns, the returns which would result in the greatest tax adjustment, and send the remaining returns back to the IRS Service Center.  This effectively reduced the odds of a return being audited when it was one of the last returns filed.

I’ve also talked to other CPAs who have been practicing for years and many of them also believe that being one of the last returns filed reduce your audit risk. Based on IRS statistics the odds of being selected for an audit are slim no matter when you file, so this may not be the best reason for filing an extension.

A better reason to ask for an extension to file your income tax return is a quality-of-life issue. Reduce the stress in your life.

For example, if you’re a small business owner it can be a major effort to organize and prepare your books and financial statements in order to file a tax return. Take a load off. Give yourself time to organize your books and records so you can prepare an accurate income tax return.

Another reason? The income tax laws are complicated and at times you’re faced with choices. For example, capitalize or expense? Give yourself additional time to understand the significance of the options available and enable yourself to choose the best one.

One more. If you’re smart enough to hire a CPA to prepare your income tax return, answer this question for yourself. Would you prefer to have your income tax return completed by CPA with blurry eyes and a tired mind a few days before the filing deadline or would you prefer to file for an extension of time to file and have a bright eyed quick minded energetic CPA prepare your income tax return?

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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