In a recent Wall Street Journal article, Laura Saunders presented a compelling case for taxpayers to consider filing their tax return late this year.
To clarify, neither Ms. Saunders or any of us condone the notion of ignoring the federal tax laws. Instead, the suggestion is to consider doing what 11 million taxpayers do, and that is to file an automatic extension and delay the due date of your 2009 Form 1040 to October 15, 2010. The IRS has streamlined this process so that all taxpayers now qualify by simply filing From 4868 by April 15th.
An extension to file, however, is not an extension to pay. You still must estimate and pay your taxes by April 15th to avoid incurring additional penalties and interest for any shortfall.
The most obvious reason for filing an extension is for taxpayers who have not yet received all of their third-party information regarding income and deductions. Investors who have not received final 1099 forms or don't have K-1 forms from partnerships often have to file for an extension. In these cases, an extension provides enough time to get final numbers so that the tax return is complete and accurate the first time.
There are, however, two very good reasons this year to obtain an extension.
First, certain homebuyers may be eligible for one of the two tax credit programs - $8,000 for first-time homebuyers, and $6,500 for some repeat buyers. These credits can be claimed on the buyer's 2009 tax return if the contract is in place by May 1st of this year, and completed by July 1st. If the sale cannot be completed by April 15th, it would make sense to extend the return to retain the ability to claim this credit early. Otherwise, the credit can be claimed on the buyer's 2010 tax return if they want to wait another year to get the money.
Second, taxpayers who converted their taxable IRAs to a tax-free Roth IRA during 2009 may want to extend their return to buy additional time in case they want to undo the original conversion. This might be prudent where the account has declined in value since the date of conversion. Reversing the conversion might reduce the amount of taxable income that has to be recognized when converting from a taxable IRA to a tax-free Roth IRA.
Perhaps the biggest concern we hear about an extension is whether any sort of stigma attaches to the return as a result of the extension. In other words, does the IRS presume some type of dark motive on the part of taxpayers who apply for an extension?
We certainly don't think so, and have no evidence that an IRS examination was ever triggered by an extension. Instead, the IRS employs a sophisticated (and top secret) software program to "score" tax returns and identify anomalies that would indicate the potential for underreporting. It would appear the IRS is more interested in what is in the tax return instead of simply when it was filed.
