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EXTREMISM IN PURSUIT OF AN EXTENSION IS NO VICE

April 13, 2007

OK, the tax deadline is upon us. Counting today, we have five days to make our peace with the IRS.

Well, no, We have six months and five days, actually. All you need to do is file Form 4868 to get until October 15 to file your taxes. Just make sure you have at least 90% of your taxes paid in. It's smarter, of course, to be all paid in, but you avoid the 1/2 percent underpayment penalty if you are 90% paid in.

If you are a quarterly estimated tax filer, you should pay in enough to cover your first quarter 2007 estimated tax payment. You can credit it to 2007 when you finally file your 1040, and in the meantime it serves as a cushion in case your 2006 tax bill turns out to be more than you anticipate.

Some people don't like to extend. The typical arguments:

"I'm more likely to be audited." Nonsense. I have seen no evidence that extended returns attract IRS attention. It is clear, though, that returns with errors do attract IRS attention. If taking an extension means you file a more accurate return, you actually reduce your chances of an audit. That's especially true if you would other wise have to file an amended return to fix an error.

"I want the statute of limitations to run." This is actually has some merit, if you have a controversial position on your return. It also rarely applies in real life. While I'm sure it happens, I've never seen a client have to pay extra taxes because they kept the three-year statute open an extra few months by extending a return. Again, if by extending you make your return more accurate, you probably reduce the chances of the IRS looking at you.

Extensions also give you time to consider other options for your 2006 return, like a SEP. So take your time - extend it, don't amend it.

This is one of a series of daily tax tips appearing here at www.taxupdateblog.com through April 17, this year's tax deadline. Collect them all!

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