When is the best time to file a tax return? I hear if you wait until April 15, you stand less of a chance of being audited.
Like so many other things you hear on the street, this one is an urban legend, too.
The IRS has a minimum of three years to audit your return. If they decide to examine your return, they have plenty of time. If they find your return “interesting,” the “last minute rush” isn’t going to diminish the chance of an audit.
Frankly, if you wait until the last minute to prepare (or have someone else prepare) a tax return, you are more likely to make a silly mistake, which will increase the chance of an audit.
This brings up another question, when should you prepare a tax return. Generally speaking, February is the best time. It generally takes several weeks into the new year before you receive all of the W-2s, 1099s and other important tax information.
Employers are required to send you your W-2 by January 31. Similar deadlines apply to other filings. Shareholders in S corporations, partners in a partnership, and trust beneficiaries are used to waiting even longer for their K-1 forms. Sometimes those forms come so late that partners and beneficiaries have to file for an extension.
Never file your return until you receive all of the tax information you are expecting from others. If you file too early, you might get another tax statement that you had forgotten about. At the very least, that means you’ll have to recompute your taxes. If you have already filed, it means you’ll have to file an amended return.
If your return doesn’t match the information reported to the IRS by others, the IRS will probably contact you. When information doesn’t match, the IRS generally assumes that your numbers are wrong and the burden is on you to explain any differences.
Once you have all the information, you should prepare your return as soon as possible. If you owe tax, it gives you a little time to make arrangements to pay without paying further penalties.
One of the classic situations I’ve seen is where a taxpayer had taxes withheld in the wrong state. If the return is filed early, you can get a refund from the “wrong” state and use that refund to pay the “right” state. The same thing happens when you have a refund coming from federal taxes but owe the state (or vice versa). If you procrastinate until April 15, you’ll have to dig into your pocket to pay now, and wait for a refund!
If you have a refund coming, by all means, file right after you prepare your return. The sooner you file, the sooner you’ll have your money. The quickest way to get your refund is to e-file and use direct deposit to your bank account.
If you owe, you have several different options:
You can e-file your return now and mail your payment later with Form 1040V, which is a payment voucher. As long as you mail the payment by April 15 (April 17 this year), there is no penalty.
Another option if you e-file is to mark your return for automatic withdrawal from your checking or savings account. You specify the date of withdrawal. You can either pay now or put off paying until the payment is due.
If you mail the return, the same options apply. You do not need to enclose payment with the return. You can send it later with the voucher or you can specify an automatic withdrawal.
If you use an automatic withdrawal, I recommend you set the date for early April, sometime between April 5 and April 10. This allows you to go back and check that the withdrawal was actually made. Occasionally, the withdrawal isn’t made, and if you wait until the last day, you end up paying interest and possibly a penalty.
If you make estimated tax payments, you can include your estimated tax payment for this year with any tax due for last year. Or you can have a tax refund credited to this year’s estimated tax.
