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DOWN TO THE WIRE? MOVE THE WIRE!

April 09, 2004

Tax season is drawing to a close. Thursday evening hordes of pallid, red-eyed tax preparers will rush to their favorite nightspots to get rowdy, only to fall asleep in their first beer.

In other words, maybe you don't want these earnest but groggy professionals to finish your return just right now. Maybe it's best to let them rest up a bit first. Remember:

THE EXTENSION IS YOUR FRIEND!

Individual returns can be extended with Form 4868, no questions asked. All the government asks is a reasonable guess as to your tax, and that you pay in enough to have 90% of your total tax for 2003 paid in by April 15. You then have until August 15 to get it all right.

But won't that make my return more likely to be audited?

No. Returns get audited based on what's on them, not on when they are filed (ok, if you are just getting around to filing your 1987 return, you are likely to get audited).

But the statute of limitations will be open that much longer if I extend.

Yes, that is true. But let's put this in perspective: a tax practitioner very close to us who has been in this game since the Reagan administration has seen exactly no cases where an IRS agent discovered an issue in an open year on an extended return that would have been safely closed to the agent absent the extension.

In fact, sometimes keeping the statute open those few extra months actually helps taxpayers. Last summer tax scientists in Iowa discovered a new and improved tax break for S corporation shareholders based on a new position issued by the Iowa Department of Revenue. Those who had extended their 1999 returns were able to file refund claims, some for tens of thousands of dollars. Those who filed on time were out of luck - the statute of limitations for refunds had closed.

But what if I guess wrong when I guess my extension payment?

One word: "sandbag."

OK, some more words. If you pay in at least 90% of your balance due, you will only owe interest on the difference if you pay it by August 15. The interest rate is currently 5% - maybe more expensive than your home equity line, but probably cheaper than your credit card.

If you fall short of the 90% level, you will pay a 1/2% per month penalty in addition to the interest.

Where can I find this "extension" of which you speak?

Right here.

What about state returns?

Many states honor the federal extension. Iowa automatically extends your return to October if you are 90% paid in. Check your return instructions or your state's department of revenue website.

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