Here we are in the thick of tax season and lots of people are getting their shoeboxes full of reciepts together, organizing their credit card statements and cell phone bills, so that they prepare their tax returns or go to their accountant to do it for them.
Some of us — the enviably well organized — may already be done. Maybe they’ve even prepared their returns already. So now, to file now and get it done? Or to wait until April 15th? Certainly you don’t want to be late (or if you have to be late, you want to file for an extension of time to file), but now the question is: on time or early?
What? No Gold Star? Three Ways Filing Early Might Help
Surprisingly, except three narrow situations, in most circumstances, filing early does you no good. You don’t get extra points or anything.
What you might get, if you are owed a refund, is your refund sooner than if you filed later. That’s one of the three situations: get your refund sooner.
The second situation is where you owe back taxes from prior years and are trying to set up a payment plan or an offer in compromise (that is — settle your whole debt for less than the full amount owed — you’ve soon the excessively rosy ads for this program on late night TV and heard about it on the radio, maybe even seen it in Google Adsense contextual advertising on the internet).
If you are trying to set up a payment plan or get an Offer in Compromise, you need to get your tax return filed to get that most recent tax year (now, 2008) included in the deal. Otherwise, it becomes its own separate obligation, and often that only complicates things.
The third situation is just a peace of mind sort of thing: If it will make you feel better knowing that your tax return is prepared, done, filed — signed, sealed, delivered — as Stevie Wonder might say, and as President Obama borrows from to rouse the crowds, that satisfied sense of completion, having that unpleasant chore done and checked off the To Do list could be another reason to file early.
On Time is as Good as Early, Actually, it May be Better
But under the rules, at least as I’ve read them, other than these three situations, filing early puts you in no better position than if you file on the due date, April 15th.
In fact, in one way, it potentially puts you at a disadvantage.
Here’s how: if you file on time, on the due date (April 15th), or after that, the IRS has three years from the day you file your tax return to assess your taxes. Most of the time this process of assessing happens quickly: the IRS reviews your return, and for most taxpayers, the IRS accepts their returns as accurate and agrees.
For example, you say you owe 3,500 in taxes, you had 3,000 withheld from your paycheck and you enclosed a check for $500 with your return — you say you’re “even” and “paid up” and the IRS agrees. You’re done.
But, for some taxpayers, the IRS either disagrees or isn’t so sure. In those situations, it will initiate an audit (or “examination” as the IRS tends to call it). In an audit, the IRS will recalculate and tell you how much it thinks you owe. Or it will say to the taxpayer, essentially, “we think your tax return is wrong — please provide documents to support x, y, or z deductions.”
The IRS has three years to do this audit process, and then assess what the tax bill is.
Or, more exactly, the IRS has three years if you file your tax return on the due date or later. If you file early, say on March 15th, instead of April 15th, the three year countdown clock for the IRS to audit and asses does not start ticking until the final due date, April 15th.
Do You Want to Give the IRS the Gift of Time?
So, by filing a month early, you give the IRS an extra month to think about your tax return and decide whether to accept it as filed, or to challenge it with an audit. If the IRS uses that extra time to decide to audit you, you have done yourself harm by giving the IRS extra opportunity to audit when it otherwise would not do so.
It is unlikely that it happens often. And, in fact most taxpayers, whether individuals or businesses, don’t get audited. But considering how stressful getting a letter from the IRS saying they intend to audit (the letter will likely say “examine”) your tax return, who wants to increase the chance of that happening?
This is counterintuitive. One would think that nothing could be better than just getting this big chore done and over with. But the three circumstances where filing early does you good are narrow. In all likelihood, you’re better off filing on time rather than early.
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