The Case for Filing Your Taxes Late
Eleven million taxpayers do, and it can be a smart move, especially for people with complex returns.
Those who are in the process of converting taxable Individual Retirement Accounts to tax-free Roth IRAs can use an extension to make money-saving moves. Home buyers who haven't completed their purchases but plan to take either of two generous federal tax credits can benefit by waiting.
A few years ago the IRS streamlined this process. All taxpayers now qualify for an automatic six-month extension to Oct. 15. To claim it you simply submit Form 4868, which is one page long, by April 15.
There is a catch, of course. Extension to file doesn't mean extension to pay, so you can't just put off the process for six months. Taxpayers must estimate and send in by April 15 the amount they will ultimately owe. If there turns out to have been an underpayment, Uncle Sam charges interest from April 16 until the date the return is received. (The rate is currently 4%.) If the shortfall is more than 10%, taxpayers can expect to get hit with additional penalties beyond interest owed.
With overpayments, things work differently. The IRS's interest meter doesn't begin to run until at least 45 days after a return is filed, so Uncle Sam gets the float.
Tax preparers say that filing for an extension, even if it means a delayed refund, is almost always preferable to the alternative: filing a return by April 15 and then filing a formal amended return later.
"Amended returns take longer to process, and they get audited," says CPA Douglas Stives of Monmouth University in New Jersey. "The dumbest thing is to file before final documents are in and then amend the return."
This is particularly true for investors who haven't yet received final 1099 forms for dividends, interest and capital gains. Investors also frequently don't have K-1 forms filed by partnerships until months after April 15. Another advantage: Extended returns are eligible for electronic filing; amended returns must be filed on paper.
More people are likely to seek extensions this year. Last November, lawmakers voted to continue the first-time home-buyer tax credit of $8,000 into 2010 and also added another credit of $6,500 for some repeat buyers. Either credit may be claimed on the buyer's 2009 tax return if the contract is in place before May 1 of this year and the deal completed before July 1. Buyers who don't complete their purchases by April 15 should get an extension unless they want to claim the credit on the 2010 return, which also is an option.
For those who are making Roth IRA conversions, filing for an extension can juice returns. The rules allow taxpayers to reverse their conversions until Oct. 15, either with an extension or an amended return.
Savvy investors are setting up multiple Roth conversion accounts in early January, with a separate account for each asset class, and then waiting the maximum 22 months -- until Oct. 15 of the following year -- to see which assets have prospered and which haven't. They plan to undo the conversions for accounts that decline in value after conversion.
In other words, if you put a $25,000 asset in a Roth, and 22 months later it is worth $15,000, you don't want to pay taxes on the higher amount. You are better off reversing the conversion and redoing it before the asset rises again.
All of this is legal. The main restriction is that Roth accounts that have been reversed can't be converted anew for 30 days or until the year after the conversion, whichever is later.
Although automatic extensions are useful, one group of taxpayers should take extreme care. If you own or have signature power over an offshore bank account, you are required to file a special, annual, non-IRS Treasury form by June 30, giving details of the account. The penalties for failing to file this form can be severe, and the Oct. 15 extension doesn't apply.
Monday, March 1, 2010