Tax Log 4/15/12

Since my pre-Easter post was a lecture on timely filing, I thought I’d use April 15^th to talk about why filing an extension is actually a good thing. Let me say that an extension doesn’t in any way get you off the hook for paying your taxes.  If you don’t pay Uncle Sam what you owe on April 17^th the IRS imposes a penalty of one-half percent each month on the amount of tax owed.  If you do an extension you must file your taxes by October 15^th.  If you miss that date the IRS charges you a penalty of 5% per month, up to 25%.  Neither approach is a good way to help lower the federal deficit. 

Here are my reasons not to file your taxes this week.

If you are missing key information – don’t guess.  Again, you want to make sure you’ve paid what you owe – but not having the K-1 or other key documents might mean you have to file an amended return.  That’s not the end of the world, but you are giving the IRS two returns to work on in terms of looking for issues.  That can’t help reduce your audit odds.

Sometimes you really have other things going on that are more important.  If there’s been an unexpected illness or death in the family, just file the extension. 

If you’re self employed and have a Keogh plan or SEP set up, you can use the time during the extension period to find the cash to make a deductible contribution that applies to tax year 2011.  If you had a good year income wise, but you’re short on cash now, this is a winning strategy.

If you’re self employed and have a Keogh plan or SEP set up, you can use the time during the extension period to find the cash to make a deductible contribution that applies to tax year 2011.  If you had a good year income wise, but you’re short on cash now, this is a winning strategy.

For people with Roth conversion remorse, you can use the extra time to reconvert your Roth back to a traditional IRA.  (No contribution opportunity here – this is just a “do over” from your decision to switch the type of plan you’re in.)   It’s worth noting that one of the reasons to “re-characterize” is if the value of your account declined since you converted.  You pay taxes on the value in the account at the time of conversion, not at the time you file your taxes 

Here’s one I hadn’t hear before.  There’s a school of thought that says you reduce your chance of being audited by filing later.  The logic is that the IRS samples a batch of returns that are timely filed, so if you haven’t filed, you can’t get caught in that net.  I think it’s a reach – but thought I’d pass it on.