Over the past month or two, taxpayers have been receiving various tax documents in the mail. These include W-2’s from their employer and Form 1099’s from their banks and brokerage firms. There is also an increase in the publicized prosecution of “tax cheats” in the news (designed to remind us that while we have a “voluntary” tax system, the government will inflict pain upon us if we do not voluntarily comply). These tax documents ring in the new tax season much like the arrival of pumpkins remind us of the coming of Halloween.
Here are some selected tips and traps for your Income Tax Returns:
Here are the deadlines for filing 2009 Federal and Illinois Income Tax Returns for Calendar Year-End entities:
- Corporations: March 15, 2010
- Individuals: April 15, 2010
- Partnerships: April 15, 2010.
- Trusts and Estates: April 15, 2010.
- Fiscal Year-End entities that are not on the Calendar Year will have different filing deadlines.
- The filing deadlines are based upon how the entity is taxed. For example, LLC’s can elect to be taxed as a Partnership, S Corporation, C Corporation, etc. If the LLC has elected to be taxed as either an S Corporation or CCorporation the filing deadline is March 15th and if it has elected to be taxed as a Partnership the filing deadline is April 15th.
- There are some exceptions where Taxpayers are outside of the country on the filing deadline, are in the armed forces overseas, etc.
- When Due: By the filing deadline, Taxpayers can either file their Returns or file an “Extension”. If neither is done, the law allows the Internal Revenue Service (IRS) and Illinois Department of Revenue (IDOR) to assess late filing penalties, even if there is no tax due. In past years, the IRS and IDOR did not generally assess late filing penalties if there was no tax due. However, due to the current cash crunches, they are more likely to assess every penalty allowed under the law.
- What Can Be Extended: Taxpayers can extend the filing of Returns but not the payment of any income tax due. The Federal and Illinois tax laws allow the IRS and IDOR to charge interest and stiff penalties where a tax is paid after the original due date of the Return, even if the Return is properly Extended on a timely basis.
- Illinois: Generally, if you owe nothing with the filing of your Illinois Return, the timely filing of a Federal Extension will serve as a valid extension of the time to file your Illinois Return. However, if a tax is due with the filing of your Illinois Return, the Federal Extension alone does not help you. The Illinois Department of Revenue can assess a late filing penalty on top of interest and penalties on the tax due. Some Taxpayers will pay in a small amount with an Illinois Extension as a prophylactic measure just to be sure that their Illinois Returns are validly Extended.
- Strategies: There are various considerations that can be made in deciding whether to file Returns by the original filing deadline or file an Extension, including:
- If you do not have all of your final tax information, it is not advisable to file an incomplete Return. First, when you sign the Return, you are stating, under oath, that the Return is complete and accurate when it is not. If you know that the Return is not complete and accurate you are violating the law. Second, if you file your Returns and then discover that it was not complete and accurate, you are required to file an Amended Return.
Some adjustments to your Federal Return require that you file an Amended Federal and Amended Illinois Return.
- Over the past 3 to 5 years it has become increasingly common that people file Returns before they have complete and accurate information. For example, banks and brokerage firms issue Form 1099’s and then, a month or 2 later, issue “Corrected” Form 1099’s. Another example is where taxpayers make investments that they later realize are LLC’s or Publicly Traded Limited Partnerships that issue Schedule K-1’s (and often they are sent out after April 15th). I recommend that you ask your broker(s) to see check to see whether any “Corrected” Form 1099’s are being considered and whether you have an investment that will be reported to you on a separate Schedule K-1.
- If you think that a tax might possibly be due and want to file an Extension, I recommend that you pay in way more than you think might be due when you file your Extension. If you pay in too little, the IRS and IDOR charge interest and very stiff penalties on the tax due. If you pay in too much, you can either elect to have it refunded to you, or apply it to your 2010 tax year. Overpayments that are applied to the next tax year are treated the same as a 1st Quarter Estimated Tax Payment. If you plan to make a 1st Quarter Estimated Tax Payment, I recommend that you instead add that amount to the Extension Payment since the Extension Payment does 2 jobs at once: protects you from penalties and interest for 2009 and the overpayment is treated as a 1st Quarter Estimated Tax Payment for 2010.
- Your tax preparer may be required to spend more time (with resulting higher fees to you) if you Extend your Return. First, the Extension(s) must be prepared and filed. More importantly, if you want to know whether a tax might be due, your tax preparer must prepare your Return based upon estimated figures and then again when final figures are provided. If a tax is due, the preparer must provide you with Extension Forms and Filing Instructions so that you can file them, along with your check.
- Sometimes there is a strategy as to whether a parent takes a child as a dependent or whether the child takes him or herself as an exemption. If this is being considered, I strongly recommended that neither the parent nor the child file their Returns before the final determination is made.
- Some people believe that if they file their Returns by the original due date, they will be less likely to be audited by the government. Others believe the opposite.
Form of Delivery:
I always recommend that taxpayers consider filing their Return or Extensions via Certified Mail, Return Receipt Requested so that they have evidence of a timely filing. Separately, if the filing address is a P.O. Box, they may not accept filings via Federal Express, UPS or the like.
Where to File:
There are numerous different mailing addresses for tax filings. You must be sure to use the correct address. Here are just a few examples:
- The filing addresses may be different for each type of entity (e.g. Corporation versus Partnership, versus Individual).
- The filing address for a Return may be different depending upon whether a tax payment is due or no tax payment is due.
- The filing address may be different for an Extension than it is for the Return.
Taxpayers who have made, or are considering making IRA’s contributions must make their decisions before they file their Form 1040’s and before April 15th. For example:
- Often, Taxpayers do not know whether or how much they can contribute to an IRA (whether Traditional or Roth) until their final Form 1040 calculations are complete. They must coordinate with their tax preparer regarding the calculations and timing.
- If a Taxpayer has already contributed to an IRA and it turns out that they contributed more to an IRA than they are legally allowed they generally have until April 15th to remove the excess. In some cases Taxpayers can elect to leave the contribution but treat the excess as a non-deductible contribution (if so, IRS Form 8606 must be prepared and attached to their Federal Return).
- IRA contributions can be made after the date that a Taxpayer’s Federal Form 1040 is filed. However, generally, the contribution must be made not later than the original due date of the Return, not including extensions.
- When making IRA contributions, make sure that they are properly designated as to the year (i.e. 2009 versus 2010) and type (e.g. Roth versus Traditional).
Minutia Could Be Critical:
Often subtle differences in facts can have a dramatic effect on the tax impact. If your tax preparer provides you with checklists or an “Organizer” be sure to read it carefully and fill it out. Not only can it help trigger your memory, but it can alert you to a new tax law that could affect you.
There is a long list of laws, strategies and best practices to be considered each tax filing season. Some of these are discussed above. Although filing a Return or an Extension is routine, it does not mean that there are not many critical issues to consider. Each Taxpayer can then decide how they want to balance various timing issues, filing deadlines, cash flow, preparation fees, possible Amended Returns, etc.
Copyright ©, Keith B. Baker – 2010
This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.
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