The Van Tharp Institute

April 11, 2007 — Issue #316

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In this Issue:

Workshops

Blueprint and Peak Performance Discount Expires Friday, April 13th

Feature Article

Haste Makes Risk When It Comes to Filing Federal Tax Returns by Jim Crimmins

Trading Tip

Where to Go for Good, No-Cost, Online Financial Info, by D.R. Barton, Jr.

Melita's Corner

Push Those Buttons, by Melita Hunt

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Workshops

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Feature

Haste Makes Risk When It Comes to Filing Federal Tax Returns

by
Jim Crimmins

Trading is a fast-paced business where the race often goes to the swift of mouse. But when it comes to filing your federal income tax return, that same rush to meet the April deadline may cost you tax savings and increase your chances of an IRS audit.

In the best of all worlds, your tax return would be buttoned up, complete, correct and maximized for tax savings by an accounting professional, each year and filed well before the Ides of April. But those of us living in the real world know that life rarely presents such best-case scenarios.

Traders, by virtue of our unique trader tax status, have more complex returns than other taxpaying individuals. For instance, when you elect the mark-to-market accounting method for the first time, you need to prepare IRS Form 3115 (Application for Change in Accounting Method) and assure that your opening and closing figures are accurate. If you did not elect MTM, you need to accurately capture your wash sales, no small feat in itself.

All of this takes time: time for you to collect and organize your tax year data and time for you to request from you such additional information as we may need to complete your return for minimum audit risk and maximum tax advantage.

Since many traders rarely pull their annual tax accounting data together before the end of the first quarter, it leaves a very short window in which to prepare a complete, accurate and tax-advantaged return by April 15th. But filing an incomplete, hastily prepared or downright sloppy return is one of the quickest ways to attract undue IRS attention. The solution? Simple: file an extension.

File an Extension

By filing Form 4868 (Application for Automatic Extension) by the April 15th deadline, you allow yourself and your accounting firm an extra six months to complete a buttoned-down, accurate return. But beware, the extension does not apply to the taxes you owe; you must pay at least 90% of the tax-due figure (its required on Form 4868) by the April 15th deadline.

If you fail to pay in a timely fashion, the IRS will rule your extension invalid and you’ll likely face late filing and late payment penalties, as well as interest on any late payments (this does not apply, of course, if you are due a refund). For this reason, some traders prefer to pay 100% or more of their tax bill just to be on the safe side; any overpayment rolls easily into this year's quarterly estimated payments.

Extension Risk an Urban Myth: It is an urban myth that filing an extension increases your odds of an IRS audit; a valid extension simply pushes your return deadline to Oct. 15, no stigma or red flags attached. Many traders routinely file extensions year after year and use the extra time wisely to organize their books, consider their tax strategies and fully capture such items as business expenses and home office deductions.

In fact, it actually may be advisable for some traders to file an extension and delay filing their return until after the April 15th rush, when IRS scrutiny drops off and examining agents are reassigned to other tasks. This scenario almost certainly benefits those filing for a refund due to trading losses on Form 1045 (Application for Tentative Refund), an IRS target category. Another advantage: if you’re strapped to make your first-quarter estimated payment this year, you can increase your tax payment for last year to cover it when you apply for an extension on last year's return.

Conversely, filing a sloppy, hastily prepared return does increase the likelihood that the IRS will want a closer look, especially now that the feds have revitalized their enforcement efforts. The IRS is particularly interested in self-employed taxpayers, a group it considers the worst of the tax scofflaws.

Are You Audit Bait?

What are your chances of attracting a dreaded IRS audit? In 2006, total individual returns audited increased more than 6%, from 1.2 to 1.3 million, the largest number of audits since 1998. The revitalized enforcement corps roped in a record $48.7 billion, up 10% from the previous year’s record haul.

Audits on individuals with incomes of $1 million or more were up in fiscal 2006 nearly 33%, from 12,800 to 17,000, covering about 6% of taxpayers in this category. Tax scrutiny also increased for taxpayers with incomes between $100,000 and $1 million, where audits were up 18% overall, from 219,000 to 258,000, covering nearly 1.7% in that category. Even those earning less than $100K annually saw their odds of an audit increase 4%, from 996,000 to just over 1 million, covering just shy of 1% of taxpayers in this category. 

Time is money. A tax extension is a great way to ensure that you and your tax professional both have the time needed to save you money on your federal and state income taxes.

About Jim Crimmins: Jim Crimmins is the founder and President of Traders Accounting. Jim worked with one of the largest and well-known educational organizations of the stock market where he became a master on entity structuring and developed a network of experts in the trading arena. 

Jim has become a nationally known speaker on tax strategies, entity structuring, and lifestyle change. He delivers over 30 talks a year throughout America as well as speaking in several chat rooms each month.  You can learn more at TradersAccounting.com.

Our notice about Third Party Articles

Trading Tip 

Where to Go for Good, No-Cost, Online Financial Info

By D.R. Barton, Jr.

Every day, I need to get information about the markets.  And there is a wealth of information on the internet that is both useful and costs nothing.

Over the next few weeks I’ll be delving into these sites – some in depth and some for just one item.

And I’d like your help!!  If you have found a site that is particularly useful, please send me an e-mail at drbarton@iitm.com and let me know what sites you find useful and why (also let me know if you’d like credit for your find or would care to remain anonymous).  This way many folks can benefit from the little nuggets that you’ve found!

This afternoon (Wednesday, April 11), one of the truly unusual financial rituals will happen.  The Federal Open Market Committee (FOMC) will release their minutes from the last meeting.  The meeting happened weeks ago, mind you.  And then the dance will begin as analysts pour over the data to see if there are any revealing thoughts that will move the markets 20 points at a pop.  A “less than” will be changed to “as much as” or some other word crafting and people will go crazy.

This will all take place this afternoon at 2:00 p.m.

If you’d like a place that tells all of the week’s government reports in a clean, concise layout and costs nothing, check out: http://online.barrons.com/public/page/barrons_econoday.html.

This page lists each report by day and time and has the easiest-to-read format that I’ve found.  Also, there are links on the page where you can find more about many of the reports, if you so choose.  For example, the reaction to many economic reports is driven by how close or far away from the “consensus opinion” the report numbers fall.  The Econoday / Barrons link above gives an overview of that consensus for most upcoming reports.

In the coming weeks I’ll share some of my favorite resources for news, charts, analysis and other financial info on the web.  And please remember to drop me an e-mail and let me know your favorites.  So until next week…

Great Trading!

D. R.

About D. R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world. 

He is a regularly featured guest analyst on both Report on Business TV,  and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine.

 

Melita’s Inspirational Corner

Push Those Buttons

by Melita Hunt

I am fascinated by human nature, both my own and other people's, and this fascination has taken me on a lifetime quest of learning and studying how we as humans, tick. And the subject is something that I thoroughly enjoy, just as trading is for many of you. If you came to my home, you would find an array of books, home study programs and materials on all sorts of things, but the overall theme would be self-improvement and inspiration.

However, an interesting thing happened over the weekend. Although I believe that I primarily live in the moment and have a positive attitude, an encounter happened that had me question just how evolved, learned and conscious I really am.

I ran into my ex and all of a sudden all of my buttons were pushed! If I was a jukebox I would have been completely lit up and about to explode! It just wasn’t pretty. Was it something he said? No. Was it something he did? No. In fact he was extremely polite, friendly and very loving towards me. It was my own energy, coursing through my body. I became completely “unconscious” and reverted to old patterns of behavior, including blaming him for how I felt. How funny! Especially because I am very good at coaching people and recognizing this in others and believe that I should have known better.

I am not going to go into detail about the conversation or why this happened, let’s just say that all things happen for a reason and running into him unexpectedly allowed me to recognize (albeit after the fact) that there were a lot of things that I had not addressed about our situation and that they were still affecting me. No one is to blame, not even me, it’s just a lesson and one that came to me in full, bright living color. Thankfully, I am smart enough to realize that I have some work to do and I am willing to do it.  

I welcome getting my buttons pushed because in my experience, it allows me to see (and feel) the areas of my life that need work. There is nothing nicer than living in a state of bliss, happiness, joy, love and contentment – I believe that they are our natural states.  However, to get to that place regularly you need to be willing to identify and release any counter-intuitive feelings that are being blocked or have been suppressed, and there is no faster way of doing that than putting yourself in a situation that truly pushes your buttons and recognizing that those buttons are yours to deal with; and yours alone.

You can contact Melita at mel@iitm.com

Join in the discussions on our blog and forum

www.smarttraderblog.com and MasterMind Trader Forum

 

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