When Should You File Your Tax Return?


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This time of year, you’ll find a lot of articles about how to reduce your chance of audit. One of the most powerful things you can do is rarely talked about.

If you go look on the IRS website, research court cases and otherwise do a lot of due diligence by looking up what you can find in writing, you’re not going to find this.

That’s because it’s the secret that seasoned veterans know. Two of us in my firm have worked in IRS compliance, audits and agreements for decades (literally, decades) and never lost a case. That means a couple of things. For one thing, we have a pretty good idea of what works and what doesn’t work. Sometimes the best thing you can do is just lay all your cards on the table and ask for forgiveness on penalties. That usually works pretty well if you haven’t jerked them around too much in the audit. But sometimes it means playing hardball and kicking it up the chain.

It also means we get the opportunity to talk to a lot of IRS agents. And one the questions we always ask at some point during the audit is “Why did you select this return for audit?”

It always starts with the same thing. Your name was on a list that the IRS computer kicked out.

Now this is the interesting part. There are some things that we know the IRS computer tags as high risk. That’s the “dirty dozen” that the IRS publishes every year. There are some things that the IRS keeps very close to the vest. That’s part of the algorithm on what things are outside the norm and thus are suspect.

And then there is the one obvious thing that no one talks about.

Timing.

When you file your tax return.

The first group for the sample is pulled from all returns filed by the due date. In other words, if you file your individual return by 4/15, you’ll be in that first group. You may or may not be on the list. That has to do with whether you’re on the “dirty dozen” list or the secret algorithm kicks you out.

That’s the list that the auditors get first. They have a quota. So, let’s say they are supposed to audit 50 people. They will likely go through the details and select 50 returns to audit right away.

A little later, a second list comes out. These are the people that filed later, using an extension.

Most auditors have already filled their audit quota with the first list and they have already begun the process, scheduling out the letters to go to taxpayers. Most don’t even look at the second list.

What does this mean for you? It means that if you file later, you have a much lower chance of audit.

There is one other factor that goes into determining who gets audited. You have added audit risk if you file an amendment. There are times when I review returns for new clients and I see that they had left a lot of tax money on the table from the years before. First, I see if there is a way to legally pull those missed deductions into the current year. In some cases, you can. Then, I look to see what the cost to prepare the amendment versus the benefit would be. (Cost-Benefit analysis, that’s the best way to make business decisions)

And finally, is it worth the potential audit risk? Every amendment is looked at by a human being. It isn’t a case of running it through a computer formula; it’s a case of an individual deciding whether this amendment might bear looking at further. That’s the more subjective part of this decision. If you are audited, are you, as the taxpayer, set for that? It’s an emotional time and can be very time consuming. If your records are in good shape, it might not be a big deal and the money back is just a benefit.

Otherwise, it might be a good idea to forego the amendment.

Like everything else with tax work, when and even whether to file needs to be based ona strategy.



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