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| Haste Makes Risk When It Comes to Filing Federal Tax Returns |
04-04-2008 |
Trading is a fast-paced business where the race often goes to the swift of
mouse. But when it comes to filing your federal income tax return, that same
rush to meet the April 15th deadline may cost you tax savings and increase your
chances of an IRS audit.
In the best of all worlds, your tax return would be buttoned up - complete,
correct and maximized for tax savings - by a Traders Accounting professional
each year and filed well before the Ides of April. But those of us living in the
real world know that life rarely presents such best-case scenarios.
Traders, by virtue of our unique trader tax status, have more complex returns
than other taxpaying individuals. For instance, when you elect the mark-to-market
accounting method for the first time, we need to prepare IRS Form 3115 (Application
for Change in Accounting Method) and assure that your opening and closing
figures are accurate. If you did not elect MTM, we need to accurately capture
your wash sales, no small feat in itself.
All of this takes time: time for you to collect and organize your tax year
data and time for us to request from you such additional information as we may
need to complete your return for minimum audit risk and maximum tax advantage.
Only when we have your full tax picture can we provide you with the industry-leading
trader tax expertise you depend on from Traders Accounting.
Since many traders rarely pull their annual tax accounting data together
before the end of the first quarter, it leaves a very short window in which to
prepare a complete, accurate and tax-advantaged return by April 15th. But filing
an incomplete, hastily prepared or downright sloppy return is one of the
quickest ways to attract undue IRS attention.
The solution? Simple: file an extension.
Extension Risk an Urban Myth By filing Form 4868 (Application for Automatic
Extension) by the April 15th deadline, you allow yourself and us an extra six
months to complete a buttoned-down, accurate return. But beware: the extension
does not apply to the taxes you owe; you must pay at least 90% of the tax-due
figure (it’s required on Form 4868) by the April 15th deadline.
If you fail to pay in a timely fashion, the IRS will rule your extension
invalid and you’ll likely face late filing and late payment penalties, as well
as interest on any late payments (this does not apply, of course, if you are due
a refund). For this reason, some traders prefer to pay 100% or more of their tax
bill just to be on the safe side; any overpayment rolls easily into this year’s
quarterly estimated payments.
It is an urban myth that filing an extension increases your odds of an IRS
audit; a valid extension simply pushes your return deadline to Oct. 15, no
stigma or red flags attached. Many traders routinely file extensions year after
year and use the extra time wisely to organize their books, consider their tax
strategies and fully capture such items as business expenses and home office
deductions.
In fact, it actually may be advisable for some traders to file an extension
and delay filing their return until after the April 15th rush, when IRS scrutiny
drops off and examining agents are reassigned to other tasks. This scenario
almost certainly benefits those filing for a refund due to trading losses on
Form 1045 (Application for Tentative Refund), an IRS target category. Another
advantage: if you’re strapped to make your first-quarter estimated payment this
year, you can increase your tax payment for last year to cover it when you apply
for an extension on last year’s return.
Conversely, filing a sloppy, hastily prepared return does increase the
likelihood the IRS will want a closer look, especially now that the feds have
revitalized their enforcement efforts. The IRS is particularly interested in
self-employed taxpayers, a group it considers the worst of the tax scofflaws.
Are You Audit Bait?
What are your chances of attracting a dreaded IRS audit? In 2006, total
individual returns audited increased more than 6%, from 1.2 to 1.3 million, the
largest number of audits since 1998. The revitalized enforcement corps roped in
a record $48.7 billion, up 10% from the previous year’s record haul.
Audits on individuals with incomes of $1 million or more were up in fiscal 2006
nearly 33%, from 12,800 to 17,000, covering about 6% of taxpayers in this
category. Tax scrutiny also increased for taxpayers with incomes between
$100,000 and $1 million, where audits were up 18% overall, from 219,000 to
258,000, covering nearly 1.7% in that category. Even those earning less than
$100K annually saw their odds of an audit increase 4%, from 996,000 to just over
1 million, covering just shy of 1% of taxpayers in this category.
Your best hedge against an IRS audit? Traders Accounting’s industry-leading
tax expertise, of course. As traders and tax professionals, we are steeped in
the intricacies of trader taxation and the best moves to make for tax savings
today.
Time is money. A tax extension is a great way to ensure that we both have the
time to save you money on your federal and state income taxes. Contact Traders
Accounting today. We’ll help you develop your individual tax strategy for
current and future growth.
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- Well organized and very informative.
Ron Adams, Portland, OR
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