Stimulating timely returns

There’s nothing like a little stimulus to get taxpayers to file on time.

As of early April, about 9% more federal tax returns had been filed than at this time a year ago, the Internal Revenue Service said. The reason could be the economic stimulus law passed by Congress – because to get a rebate check you have to file a federal tax return.

Returns for the 2007 tax year must be filed electronically or postmarked before midnight Tuesday, unless the taxpayer files a request for an automatic extension. (Taxpayers living outside the U.S. get automatic two-month extensions and members of the military serving in combat zones don’t have to file until 180 days after their return.)

The IRS had estimated that extension requests would rise to 10.3 million this year from about 10 million last year, but that forecast was made before Congress passed the stimulus bill. The checks are scheduled to start going out in May.

“There may be a slightly lower number of extensions this year because of people filing to get the economic stimulus payments,” IRS spokesman Victor Omelczenko said. H&R Block Inc., the big tax-preparation company, made the same prediction.

That would be a departure from the recent trend, which has seen the percentage of filers requesting an extension go up almost every year for the last quarter-century, rising from 1.95% in 1982 to 2.7% last year.

The IRS hasn’t analyzed the reasons for the increase, but a spokesman said one was the growing popularity of complex investment vehicles such as hedge funds, private equity investments and the like. It can take a while for taxpayers to receive all the paperwork they need to report the income from these investments, potentially delaying filing.

“You can have 90% of the information, but if you still need the last couple pieces of paper, it still means you have to file for an extension,” said Philip J. Holthouse, a partner in the Santa Monica tax accounting firm of Holthouse, Carlin & Van Trigt. He said extension requests were up this year among his high-net-worth clients.

Taxpayers can get an automatic six-month extension by submitting a request electronically at www.irs.gov or mailing Form 4868 before the deadline. They still must pay the taxes they owe – based on the best estimate they can come up with – either by mailing a check or through a variety of electronic payment methods.

People who can’t pay their taxes should still file a return or ask for a filing extension. They can then find out whether they can get more time to pay, or whether they can set up an installment payment plan.

In both cases, interest – currently 6% – and penalties will be applied to the unpaid balance, one reason that taxpayers should pay as much as they can by the deadline, even if they can’t pay the whole balance. Either way, the penalties for failing to file a return at all are much steeper.

Said IRS spokesman Eric Smith: “Sometimes people make the mistake of saying, ‘My return is done and I owe the government money, but I can’t afford to pay right now, so I’ll wait to file when I have the money.’ That’s a bad idea.”

People who are getting a refund technically don’t have to file a return by the April 15 deadline. But if it turns out later that they do owe taxes, they will be hit with interest and failure-to-file penalties.

In addition, Omelczenko said, if a return isn’t filed before the three-year statute of limitations on refunds runs out, the government gets to keep the money. The IRS estimates that 150,000 Californians who were due refunds for the 2004 tax year but never filed a return stand to lose a cumulative $134 million if they don’t file by tonight.

California residents don’t have to file a request to get an automatic six-month extension on state returns, although they still have to pay their estimated tax by tonight’s deadline. Returns must be filed by Oct. 15.

martin.zimmerman

@latimes.com