Prepare for Tax-Return Filing Delays
Every year, millions of taxpayers file their returns before Valentine’s Day, and not because they have a lot of love for the IRS. Most early birds are anxious to receive their refund, and with good reason. The average refund for 2011 returns totaled nearly $3,000.
But increasingly, taxpayers are being forced to wait for their checks. The IRS has warned that lawmakers’ inability to agree on how to stave off sharp tax hikes and widespread spending cuts could lead to filing delays while the agency updates its forms and computer systems to reflect last-minute changes in the tax code.
And political wrangling isn’t the only reason that filing could be delayed. A new disclosure rule being phased in will require mutual fund companies to report to the IRS the cost basis for mutual fund shares purchased on or after January 1, 2012, and sold after that date. The information will also be provided on Form 1099-B, which investors use to report investment losses and gains on their tax returns. Financial-services firms are supposed to provide 1099-Bs to their customers by February 15. But when the cost-basis rule went into effect for stocks last year, many brokerage firms asked the IRS for an extension, says Melissa Labant, tax director for the American Institute of Certified Public Accountants. Financial services firms are likely to request a similar delay this year, she says.
Filing delays aren’t just inconvenient; they could also expose you to fraud. Armed with stolen Social Security numbers, crooks are pocketing billions of dollars by filing phony tax returns and collecting the refunds. Victims of tax-related identity theft sometimes wait a year or more for their refunds. Filing early is one of the most effective ways to protect yourself from this crime, but if you’re waiting for an errant 1099-B, that may not be an option.
If your tax return is put on ice, don’t use the delay as an excuse to procrastinate. You can still pull together information on your income, charitable deductions, mortgage interest and property taxes. You or your tax preparer may be able to get a start on your return while you’re waiting for your investment documents to arrive, says Tim Steffen, director of financial planning for Baird Private Wealth Management.
You can free yourself from this annual waiting game by reducing the amount of money the IRS takes from your paycheck. Adjust your withholding by filing a revised Form W-4 with your employer. The form is used to determine how much in taxes is withheld from your paycheck. The more allowances you claim, the less is withheld.
If your 2013 financial situation hasn’t changed much since last year, you can use our tax-withholding calculator to figure out how many allowances you should claim. You’ll give yourself an instant raise, and your refund will no longer be held hostage to political gamesmanship.
Just don’t get carried away. If you have too little withheld, you could get hit with an underpayment penalty. But owing a small amount at tax time is simply good financial management, Steffen says. That way, you have the use of your money all year long.