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IT'S BETTER TO EXTEND THAN TO AMEND

April 13, 2008

If you are scrambling to wrap up your 1040, and you don't know how you can get it right by April 15, maybe you shouldn't even try.

The tax law is hard. From bitter experience, every practitioner knows how easily mistakes can happen as you rush to get stuff filed by April 15. That's why extending your return is often the wise choice.

Filing an extension is easy. All you need to do is file your Form 4868 to get another six months to finish and file your 1040. You can also e-file an extension. If you have at least 90% of your final liability paid, you will have no penalties when you pay the rest; you will have to pay 6% interest on any amount due.

If you are a quarterly estimated payment filer, it's wise to gross up your extension payment to cover your first quarter payment. That gives you some cushion on your 2007 taxes, and you can apply your overpayment to your 2008 taxes when you file the final 2007 return.

Last year we mentioned two common arguments we hear against extensions. Our feelings towards these arguments are unchanged:

"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.

Keep in mind: an e-filed return may never be seen by an actual human, while every amended return has to get at least some review from an IRS agent with the ability to refer it for examination. That shouldn't keep you from amending a return if you need to correct an error or collect money the IRS owes you. It does mean that if the choice is to extend and get it right or amend later to fix an error, better to extend than amend. And if you are paying to have your return done, amending is more expensive than extending.

Tomorrow: What you can extend, and what you can't.

Link: IRS Tax Topic 304, Extension of Time to File Your Tax Return.

This is another in our series of daily 2008 filing season tips. Only two left!

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