The TAX ATTIC

Jerry Coon, Enrolled Agent

Jerry Coon, Enrolled Agent

Reasons to file

The end of the 2009 tax filing season is coming up quickly. The majority of all tax returns are completed and either mailed in or e-filed. However, there are still several million, perhaps up to 20 million, taxpayers who are going to file an extension.

There are actually some very legitimate reasons for filing an extension. One of the most common reasons is a retirement-planning reason. Taxpayers with an SEP retirement plan are allowed to make contributions until they file their return. By filing an extension, it effectively extends the time the taxpayer has to accumulate the money to fund the SEP. That is a huge difference between an SEP and a traditional or Roth IRA. The traditional or Roth IRA must be funded by April 15, whether the return is extended or not. If the money is not in the account on April 15, it’s a contribution that counts for the next year.

A second reason to file an extension is the paperwork is just not available to complete the return. Many taxpayers today are invested in limited partnerships. Some of those limited partnerships invest exclusively in other limited partnerships. It’s their special form of diversifying. However, if just one of those other limited partnerships is late in getting their information out, it’s the domino effect, with the net effect that whoever is invested in the original limited partnership has to file an extension.

A third reason to file an extension is some particular piece of information is not available for the cost basis of property that was sold such as a stock, mutual fund, or land. In today’s investing environment, many taxpayers have liquidated investments. The brokerage company involved always reports the gross sales price to the Internal Revenue Service. The IRS has one side of the story: the selling price. The part that is left to the taxpayer is to determine and report the cost of the item that was sold. If the taxpayers have purchased everything that was sold through the same brokerage company, usually they are provided with a cost basis statement.

However, switching brokerage companies is a fine art today. Every time there is a switch, the new company usually has no idea of the cost basis of stocks or mutual funds that are brought over to them. The taxpayer many times is not aware that no one is keeping track of that important item either-not aware, that is, until it’s time to file a tax return and the taxpayer is missing cost basis on several sale transactions.

Sometimes, the purchase price is not the cost basis, particularly in inherited situations. Under the estate tax rules in existence at this time, when a piece of property is inherited, the inheritor is allowed to increase or step up the basis of the property to the fair market value on the date of death. That is an incredible advantage for the inheritor. It’s relatively easy to figure out the fair market value when the property is sold soon after the date of inheritance. However, when the property was inherited 10 years ago, for example, it might take a little bit of figuring and time to come up with an actual fair market value at the date of death.

An extension just might be in the cards for some taxpayers. The item that must be remembered when filing an extension is the extension does not extend the time to pay the tax due. It only extends the time for the filing of the return. When the return is eventually filed, if there is a balance due, the IRS will calculate interest and penalties going back to the original due date of the return, April 15. Interest will be computed at a rate of four to six percent and a penalty will be computed at a rate of one-half percent per month, accumulating every month. The first month’s penalty is one-half percent. The second month’s penalty is one percent. The third month’s penalty is one-and-one-half percent. The fourth month’s penalty is two percent, etc. In most instances, it pays to make an estimated tax payment of whatever might be due and pay it before April 15. Try not to let those penalties and interest accumulate. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns

Action Tax Service on Northland Drive in  Rockford.

His e-mail address is jcoon@actiontaxservice.com.

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