The IRS will begin accepting 2023 individual income tax returns on Jan. 29, but should wealthy clients file right away?
Advisors warn that the answer may be "no" in most cases, noting that early filing may not offer the same advantages to wealthy filers as they do to most taxpayers.
“While it might be tempting to file your returns at the earliest possibility, higher-net-worth taxpayers may not have the luxury,” said Brett Walters of TBH Advisors in Brentwood, Tenn.
One problem is the staggered schedule of tax-reporting forms. “Our high-net-worth clients tend to have more complex investments, which means we don’t get their tax information until the summer,” said Larry Pon, a CPA in Redwood City, Calif..
“For clients with very simple investments, such as individual stocks, expect to get the 1099 by Feb. 15,” Pon said. “For clients with mutual funds and ETFs, the brokerage firm will need to receive the tax information from the various stocks and investments before they can issue the 1099s. Clients invested in hedge funds or venture funds will get those 1065 K-1 forms much later because those funds hold many other investments.”
Some advisors say the numerous form required of wealthy taxpayers makes early filing impractical.
“Waiting until March 15 is what we suggest to clients," said Bruce Primeau, CPA, a financial planning consultant with Summit Wealth Advocates in Prior Lake, Minn. "That way they should have all finalized documents in hand. They can still get all their documents to their preparers in February, just hold off finalizing until March 15.”
Brian Stoner, a CPA in Burbank, Calif, said pass-through entity K-1s are due March 15 but many times go on extension until Sept. 15. "This can apply to LLCs, general partnerships and S corporations,” he said. “Another problem is when the investment 1099s are finalized. It can be Feb. 15 or much longer to get investment 1099-DIV and 1099-B [forms] to calculate dividend and capital gain income amounts plus foreign tax credit computations.”
Crucial forms that arrive late in the filing season could mean a client has to pay to have their taxes filed or amended—or worse. “Another issue could be the tax software preparers use,” said Primeau. “There could be undiscovered bugs in the software early on that would perhaps be caught with a later version of the software.”
Amending returns “could be a red flag to the IRS to audit the taxpayer and or penalty and interest on the amended return,” said Akron, Ohio-based Naomi Ganoe, managing director and private client services practice leader for the northeast Ohio region of CBIZ MHM.
Advisors also note that not rushing into filing offers clients flexibility.
“Your financial situation may change and you may wish to delay paying your tax liability until the filing deadline,” Walters said. “You may incur penalties and interest on the liability if the payment is delayed, but there may be an opportunity cost to paying early when the funds could have been used for another investment.”
Filing early can be advantageous in limited circumstances, advisors say.
“Sometimes we are forced to file early without all the information when filing tax returns 'married filing separately,'” Pon said. “The first taxpayer to file the tax return will determine whether the other taxpayer will have to itemize deductions or use the standard deduction, or your client can’t rely on the other parent to not claim a child as their dependent. Filing early will stake that claim.
“If this were the case,” Pon added, “file as early as possible but use estimates. Then file an extension, so that provides with more time to file a superseded return by Oct. 15. A superseded return is better than an amended tax return because it’s processed just like an originally filed tax return [and] so receives less scrutiny than an amended tax return.”