1. Employers -- this is the most obvious example.  They send W-2's to the IRS.
 
2. Banks, mutual fund companies and other financial institutions -- who send 1099's for a variety of things: interest & dividend income, security transactions (like the sale of stocks and bonds), mortgage interest, etc.
 

So, if the information sent by a TPIP to the IRS doesn't match what you put on your return, the IRS computer spits out a standard form letter informing you of the discrepancy and telling you the consequences.
 
These correspondence audits are very routine.  If you get one of these notices, chances are you under-reported your income and now have to pay additional tax, plus interest and penalty.
 
More serious audits, involving real live IRS auditors, are not nearly as common as correspondence audits, and in some cases involve a random check of a certain percentage of returns. 
 
The IRS has quotas to meet in the completion of these random audits, and my experience has been that the later you file your return, the less chance you have for "your number to come up."  To a certain extent, it's a numbers game.  If you file your return later rather than sooner, there's a greater chance that the IRS has met it quota.
 
If you file your return legally "late", there's a better chance that the IRS has already reviewed enough returns for that year, and so you have kept your hat out of the ring, so to speak.
 
Now, the IRS will never admit to this.  But it makes sense, doesn't it?  And many tax professionals have been saying this for years.  The simple fact is this:  even though it's anecdotal evidence, our clients who file "late" have a lower audit rate than those who file "on time."


How To Play "The Extension Game 
 
Here's how to file the proper extension forms.
 
Personal income tax returns are due April 15.  You can automatically extend that due date by four months by filing Form 4868, "Application for Automatic Extension of Time To File U.S. Individual Income Tax Return."

So now you have until August 15 to file your personal income tax return.
 
The nice thing about Form 4868 is that simply filing this form grants an automatic, no-questions-asked 4-month extension. You don't have to have a reason.  Just by sending this form in on or before April 15 gets you the extra four months to file.
 
Now, here's another important point about Form 4868:  This 4-month extension is NOT an extension to pay any tax you may owe on the tax return.  This 4-month extension is only an extension to file the tax return.
 
So, if you usually get a refund on your personal tax return, you are OK.
 
But, if you think you might have a balance due, or if you are not sure, then you should go ahead and prepare the return, do the calculations, and see where you stand.
 
If you are getting a refund, great.  If you're not in a hurry to get the refund, and you want to reduce the chance of audit, then file the extension form and wait until August 15 to send in the return.
 
But if you have a balance due on the return, then you should send in your balance due with Form 4868.  That way you avoid any penalty/interest for late payment of tax.
 
Then when August 15 rolls around, you send in the return, showing the Form 4868 payment as a credit.  The end result is this:  you paid your tax on time (April 15), you filed your tax return legally late (August 15) because you filed the extension form on time, and because you filed 4 months later, you reduced the chance of an audit.
 
Obviously, the key here is whether or not you have a balance due on your return.  If you have a balance due, but don't send in the payment with Form 4868, then you will have penalty & interest charges for paying the tax on August 15.
 
Again (sorry to repeat myself, but this is critical), Form 4868 is not an extension to pay the tax.  It is only an extension to file the return.
 
How To Play "The Extension Game"  AGAIN!
 
Now here's a way to wait until October 15 to file your personal tax return, again without any penalty for late filing or late payment.
 
This method only works if you happen to own an "S" Corporation.  So if you are a Sole Proprietor, a Partner in a Partnership, a Member of a Limited Liability Company, or a shareholder in a "C" Corporation, this trick won't work for you.
 
Here's how it works:

Your "S" Corporation must file a Corporate income tax return by March 15.  But the corporation can file an extension form, too.  Form 7004 grants the corporation an automatic 6-month extension, until September 15.  Form 7004 is called, "Application for Automatic Extension of Time To File Corporation Income Tax Return."
 
So, you file Form 7004 on March 15.  Then you file Form 4868 on April 15.
 
Then, on August 15, you file a second extension for your personal tax return.  This second extension is known as Form 2688, Application for Additional Extension of Time To File U.S. Individual Income Tax Return.
 
Form 2688 must be filed by August 15.  By filing Form 2688 you can extend the filing deadline by another two months, to October 15.
 
The catch is this:  Form 2688 is not automatic.  On the form, you must provide a "good reason" why the first 4 months were not enough.  And according to the IRS, "we will not give you more time to file just for the convenience of your tax return preparer. But if the reasons for being late are beyond his or her control or, despite a good effort, you cannot get professional help in time to file, we will usually give you the extra time."
 
In other words, you have to have a valid reason for requesting the extra two months.
 
And here is a "valid reason" that I've never seen refused by the IRS: You need until October 15 because you are a shareholder in an "S" Corporation that has not filed its return yet and so you have not yet received your Form K-1 from the corporation.
 
Remember, your corporation filed an extension to file its corporate tax return on September 15.  Since the corporation hasn't filed it's return yet, you don't have your K-1, so you can't file your personal return.
 
This has always been viewed as a "good reason" for needing 2 more months to file the personal return.   If you own an "S" Corporation, I recommend that you take advantage of this opportunity to file your personal return on October 15, a full 6 months after the April 15 deadline.  I've been doing this myself for years!


Part 2: How To Procrastinate Your Way To Tax Savings! (For Sole Proprietors, Partnerships and LLC's)

 
I've always liked that old saying, "Why do it today when you can put it off until tomorrow."  When in comes to taxes, truer words were never spoken!!!
 
I hate taxes.  And I hate paying taxes. 
 
Not only do I hate taxes, but I hate having to pay taxes any sooner than necessary.  Why pay taxes today when you can put it off until tomorrow?
 
But sooner or later, if you have taxable income, you are going to have to pay The Tax Man.  But at least there are some legal loopholes that allow you to legitimately postpone the payment of your taxes as long as possible, without any extra penalty or interest charges.
 
Think about it.  It's your money.  Yes, part of it has to go the government eventually.  But until that time comes, until the official Day of Reckoning is upon you, why not hang on to your hard-earned dollars as long as possible?  You get to earn more interest on your money, and you get to use that money for short-term cash flow needs.
 
Here's a little-known legal loophole that lets you wait all the way until April 15 to pay the final amount of tax due -- it's known as the "Safe Harbor Method".  Here's how it works.
 
Let's say you are doing some tax planning for Year 2002, and you are trying to figure out when to pay your income taxes for Year 2002.  Let's further assume that your business is one of the following types: Sole Proprietorship, Partnership, or Limited Liability Company (LLC).
 
(NOTE: for Corporations, both "S" and "C", see the next section for additional tips on how to legally procrastinate the paying of taxes.)
 
Since you are a Sole Proprietor, Partner, or LLC Member, you probably have to make quarterly estimated income tax payments via Form 1040-ES.  And of course, in the government's infinite and wacky wisdom, these "quarterly" payments are due April 15, June 15, September 15, and January 15. 
 
Rather than basing your quarterly income tax payments on projected or actual 2002 income, you can instead pay your Year 2002 tax based on your Year 2001 tax liability.  You just go to you Year 2001 personal tax return, take the amount of federal income tax you paid for the whole year (your TOTAL annual tax liability, not the balance due), and divide that amount by four.
What you have just calculated is the minimum amount of federal tax you have to pay for Year 2002.  It doesn't matter what your actual tax liability ends up being on the Year 2002 income tax return.  During 2002, as long as you pay the Year 2001 tax liability amount in 4 equal installments, then you can wait until April 15, 2003 to pay the rest, without any penalty or interest.
 
This is a great strategy when your income goes up from one year to the next, for at least 2 reasons:
 
1. You get to keep some of your money until April 15 of the next year, giving you at least 3 1/2 months to earn interest on that money or to use that money for other short-term needs.
 
2. You don't have to worry about figuring out exactly what your current year tax liability is going to be until after the year is over.

Keep in mind, of course, that this isn't such a great idea if your income decreases significantly from one year to the next.  Why?  Because then you end up paying in more than you were required (which I just absolutely hate to do!). You'll end up getting a refund, but it just irritates me to no end to let the government have more of my money than I'm legally required to give them.
 
So, if your income decreases substantially, then you shouldn't use the Safe Harbor Method.  You are probably better off calculating your actually tax liability during the year and paying quarterly estimates based on those currently year calculations.

Part 3: How To Procrastinate Your Way To Tax Savings! (For Corporations)

Now here is definitely one of the least-known "Little-Known" Legal Loopholes I know of.  Very few people know about this one, believe me.
 
Also, this loophole only works if you are a Corporation (either "S" Corporation or "C" Corporation).  If you are a Sole Proprietorship, Partnership, or LLC, this loophole just won't work for you.  SORRY!!  But this is yet another reason to form an "S" Corporation.
 
Here's how it works:

If you are a Corporation Shareholder/Employee, you can literally wait until the last day of the year to pay your taxes for the whole year!!!  You simply wait until December 31 to create a paycheck for yourself.  On this final paycheck, you can deduct your entire federal income tax liability for the year.  Then the corporation will eventually pay this income tax withholding amount to the government via Form 8109 (Federal Tax Deposit Coupon) or via the Electronic Federal Tax Payment System (EFTPS). 
 
Usually, small businesses have until the 15th of the next month to deposit employee withholding amounts.  So the taxes withheld on December 31 would actually be paid to the IRS by January 15 of the next year.
 
You may be asking yourself a couple questions right now, such as, "How can I get away with waiting until the last day of the year to pay my taxes?  Doesn't the government require me to 'pay-as-you-go'."
 
The answer to that question is, Yes, our tax payment system does operate on a "pay-as-you-go" basis.  And most employees who work for a company must have taxes withheld from every paycheck.  Generally, employees cannot wait until the last day of the year to pay their taxes.  It just wouldn't work.  Their gross wage amount wouldn't be enough to cover the withholdings, anyway.
 
Likewise, self-employed people (like Sole Proprietors, Partners, and LLC Members) who make quarterly estimated tax payments also have to make equal payments throughout the year.  The "Safe Harbor" method discussed in the previous section only avoids penalties and interest if the payments are made in equal amounts.
 
But as the Corporation's owner, you have much more control over your payroll system and your cash flow situation.  So if you are in a position to do so cash flow-wise, you can wait until December 31, prepare one paycheck from which you withhold most (or even all) of your income tax for the year, and then pay it all at once by January 15th.

Here's why this is a perfectly legal loophole:  This federal income tax which was withheld from your December 31 paycheck is reported on your Form W-2, which the Corporation will give to you as an employee.  Specifically, it is reported on Form W-2 in Box 2, "Federal Income Tax Withheld."  No matter when the W-2/Box 2 amount was actually withheld from the employee's paycheck, the amount reported in W-2/Box 2 is treated as if it was withheld in equal installments throughout the year.
 
Do you see why this can be a great strategy for you to hang on to your money as long as possible?  Again, assuming you can afford to wait this long, you can keep control of your money for many months before turning it over to the IRS.  You could use the money for short-term operating capital, or just keep it in an interest-bearing account.

About The Author

Wayne M. Davies, Certified Tax Professional, is a Tax Accountant and Business Consultant serving Small Business Owners and Self-Employed clients in Fort Wayne, Indiana.

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