File Your Return Early to Beat the Tax Crooks
There have always been many good reasons to file your taxes well before the April 15 deadline. But with identify theft becoming an increasingly serious problem for taxpayers, filing early has become an important strategy for protecting yourself from tax-refund fraud.
The IRS flagged more than 1 million tax returns for potential identity theft during the 2023 tax season, according to the U.S. Department of the Treasury, signaling that such fraud continues to be a pervasive problem for taxpayers. The associated refunds were worth about $6.3 billion.
While these numbers are scary, protecting yourself can be as simple as beating the bad guys to the punch. One of the best ways to reduce the risk of tax-refund fraud is to file your return before a criminal has a chance to make fraudulent claim.
How Tax-Refund Fraud Works
Tax-refund fraud is becoming increasingly common because it is surprisingly easy. All a criminal needs to file a fraudulent claim and divert the refund to the criminal’s account is your name, date of birth, and Social Security number. Given the growing number of data breaches, including high-profile incidents at Target, Home Depot, Sony, and even the IRS itself, countless Americans have had their personal information fall in the hands of criminals.
The IRS is required by law to process refunds within 30 days of receiving a tax return. Thus, if a criminal files a fraudulent return on February 15, the IRS—assuming it doesn’t flag the return as being fraudulent—has to pay out the refund by mid-March. There is a good chance that the fraud will go unnoticed until the actual taxpayer files his or her return, resulting in two returns being filed for the same Social Security number. Although taxpayers are able to recover their refunds once the fraud is detected, doing so requires a lot of headache and a lot of paperwork.
Filing your return as soon as possible is one of the best defenses against tax-refund fraud because it increases the chances that the IRS will already have your actual return on file when the second, fraudulent return comes in.
Getting a Head Start on Filing
Companies are required to mail W-2, 1098, 1099, and other important documents to taxpayers in January. Although you can’t file your return until you receive these documents, there is plenty that you can do in the meantime so that you are ready to file once those documents arrive.
Even before the end of the year, you can begin rounding up information related to charitable donations, rental property, property taxes, and medical and educational expenses. If you work from home or have a freelance business, you can start organizing information for your home-office expenses and other business expenses. In addition, you can schedule a time in January or February to meet with your tax preparer.
Other Benefits of Filing Early
Besides protecting yourself from identity theft, there are several other important reasons to file your taxes well before the April 15 deadline:
Lessen the sting of unpleasant surprises: Finding out that your tax bill is larger than you expected (or your refund is smaller than expected) is never a good thing. But the sooner you learn about it, the less painful it will be. This is because you will have more time to round up the necessary funds.
Give your accountant more time to look for deductions: The earlier you get your tax documents to your accountant, the more time he or she has to spend time thinking about ways to minimize your tax bill. At Eilts & Associates, we compare your current year’s information with previous years’ returns to look for deductions or credits you may have missed and try to identify any strategies that can lower this year’s return. For example, the deadline for making IRA contributions that are deductible from 2023 income is April 15, 2024. This can be a great last-minute strategy for lowering your tax bill while saving for retirement at the same time.
Leave time for follow-up questions: When taxpayers give information to their accountant, it often will be missing a few important items. Getting the initial information to your accountant ahead of the deadline gives the accountant time to round up any missing information or ask follow-up questions that could lead to valuable tax savings.
Get your refund sooner: If you are due a refund, waiting until the last possible moment to file your return is like giving a tax-free loan to the federal government. This is especially true if you use the six-month extension and wait until October to file. You can probably think of much better uses for that money than letting it sit in the U.S. Treasury Department’s coffers.
Keep your money as long as possible: Many people who anticipate owing money on their tax return will wait until the deadline to file because they want to hang on to that money for as long as possible. While this is smart in theory, it doesn’t make sense in practice. By post-dating your check to April 15 or setting up the electronic withdrawal for April 15, we can make sure you keep your money in your bank account until the last day possible, regardless of when you actually file your return.
Don’t hide behind the extension: Every taxpayer is allowed to apply for an automatic six-month extension for filing his or her tax return. Tax return is the key word in that sentence because the extension only applies to getting your paperwork to the IRS, not your money. You still owe the full amount on April 15, and you will be charged interest and possibly penalties for any amount unpaid after that date. At Eilts & Associates, we want our clients to send us at least their W-2 as soon as possible, even if they plan on using the extension. This allows us to estimate whether they will owe anything on April 15.
Even if you anticipate owing money on your tax return this year, it still makes sense to file your return early. By post-dating your check to April 15 or setting up the electronic withdrawal for April 15, we can make sure you keep your money in your bank account until the last day possible, regardless of when you actually file the return.
As you can see, there are a lot of reasons—including safety, accuracy, convenience, and peace of mind—to file your tax return well before April 15 this year. While identity theft is a major problem, proactive taxpayers can help protect themselves from this growing threat.
If you have any questions about filing your tax return, please contact us at 773.525.6171 or bart@eiltscpa.com. We look forward to working with you in 2024!
