April 17th is rapidly approaching, the day by which people are told they must have filed their individual tax returns with the Internal Revenue Service. I suggest, however, that you read this post carefully and listen to a recently-released podcast from The Real Estate Investing Playbook in which I cover some tax tips.
Please do not take this email as the sole source of any tax advice, but rather use this information to engage in a more substantive conversation with your accountant, tax professional or enrolled agent. My first recommendation is that you file for an extension on your 2017 tax return for two reasons. First, I believe it reduces the risk of audit. I’ll talk more about that in a bit. Second, it gives you the opportunity to request from the IRS a copy of your 2017 tax transcript (once again, your tax professional can help you do this) so you can make sure that what you are ultimately reporting on your 2017 tax return is consistent with what the IRS already knows about you. This will make things simpler and will also reduce the risk of an audit.
The reason I believe getting an extension and then filing your tax return in September or October will reduce your risk of audit is best explained in this analogy. Imagine being in Alaska and watching a huge school of salmon swimming upstream. The salmon at the back of the line are the least likely to be swatted out of the water and consumed by the grizzlies waiting at the top of a small waterfall. Why? Because the grizzlies are getting what they are looking for and being satisfied.
That is kind of how the IRS operates. They have certain categories they need to fill regarding audits. They also have certain capacities and limits as to how much they can do. These capacities and limits are not increasing given the current attitude of Congress toward the IRS. In fact, some may argue that the past administration’s “weaponization” of the IRS has given Congress reason for continuing to deny funding to the IRS to increase its staffing in the field of audits and other areas.
Politics aside, it is important to understand that your tax return needs to be accurate, and it needs to be a low-profile, ordinary, vanilla-looking filing. By coming in toward the tail end of the herd, but not being that last, lonely straggler, you will blend in and avoid scrutiny.
I do want to make you aware of a disadvantage to filing your tax return late in 2018. It may leave you with an information deficit as to how your 2018 taxes are shaping up. Over the last 25 years, I’ve had the benefit of adjusting and working on my tax profile based upon the previous year’s filing. I can see that if I do this type of transaction, this is the tax result I will receive; therefore, I am able to know what types of transactions I want to do and what types I don’t want to do. For beginning and intermediate investors, the delay in getting this important feedback could (not will) cause you to pay extra taxes a year longer than necessary. This can be overcome by continuing to educate yourself. You also need to have regular meetings with your tax professionals to get updates as your business moves forward.
I want to conclude with a shameless plug for The Real Estate Investing Playbook Podcast where you can find more information like this and many other tidbits on how to be a successful real estate investor.