Urban folklore?

[appelman]

A client has come to me quoting Nolo Press as saying that a return filed at the last minute is less likely to be audited, as is a return filed on paper. She quotes them as saying that a last minute filed paper return might never have the return details entered at all! I told her I thought this was urban folklore, but she protested that the article was written by an accountant. Anyone have a better answer?

[Koss]

Late Filing

The idea that a "last minute filed paper return" might never have the return details "entered" is preposterous. I'm not sure how to respond to such a claim. You could simply point out that very few returns have a zero balance. Most returns either have a balance due or a refund. If the IRS fails to process a return, then either the taxpayer doesn't get their refund, or the IRS doesn't know how much they owe. It doesn't make sense. It doesn't happen. All paper tax returns get entered and processed eventually.

Perhaps your client read, or heard, that a paper return filed late in the season "will probably never be looked at," meaning that it is not likely to be audited. Your client may have interpreted that to mean that it may not even be processed.

Which brings us to the other claim: a return filed at the last minute is less likely to be audited.

There may be a grain of truth to this. We'll never know, because the true inner workings of the IRS are kept quite secret.

But the theory is that returns are selected for examination during a certain window of time--supposedly during the summer--and that if your return hasn't been processed at that point, that it may never become a candidate for a full-blown audit. On this theory, it is advantageous to file an extension, and then file your return in the fall.

The problem with this theory, of course, is that audits tend to run about one year behind. I have a client who just got a notice of a full-blown field audit of his Schedule C for 2010, and that's pretty typical. So returns that are "selected" for audit during the summer of 2013 will usually be 2011 tax returns--not 2012. By the summer of 2013, the IRS has probably completed the processing of all 2011 tax returns that were filed by the extended due date of October 15, 2012.

So this theory only holds up if you somehow believe that returns are selected for audit during the summer immediately following the filing season, and that this batch of returns is then put on hold until the IRS gets caught up to the point where they can actually begin auditing them. In other words, you file a 2012 return in March of 2013, it is chosen for an audit in July of 2013, but the IRS doesn't send out a letter notifying you of the audit until May of 2014, because it takes that long for the case to be assigned to an auditor. Or something like that.

So if you don't file your return until September, your return may never be a candidate for an audit, because the IRS has already chosen all the returns from that year that will be audited.

Somehow, I just don't think it's that easy to game the system. But at the same time, I don't think the whole concept is pure hogwash.

Here's a link to a five-year old article about this idea:

http://legallad.quickanddirtytips.com/pros-and-cons-of-filing-for-a-tax-extension-taxes-part-ii.aspx

One experienced accountant I know once told me that the best way to reduce the chances of an audit was to file a balance due return without making payment, and let it go into the collections process.

"They go somewhere else," he said, referring to tax accounts with an unpaid balance. "When you owe money, they're not interested in auditing the return. They just want you to pay the bill."

BMK

[DaveO]

Returns filed near the end of the extension period compose about 10% of the audits I do. Of the returns I file probably 2% are filed near the end of the extension. While it would seem the audits are higher once you factor in the other variables. The late returns are more complex, higher AGI, more entity returns involved etc.

However I have never had an audit among returns filed more than 2 years late. Not that I would endorse that as a strategy.

[Bees Knees]

I had a client always file two years late. He always made sure to over-withhold, so there was no penalty for filing late. His reasoning was a previous accountant told him that by the time his return was filed (2 years late), the IRS had already selected all returns they were going to audit for that tax year.

I had no way of verifying whether or not it was true, so I had no reason to tell the client otherwise, other than the government was holding his refund interest free for 2 years.