I have the good fortune of having professional friends and colleagues around the country who have law practices or accounting practices which specialize in defending taxpayers whom the IRS claims owe back taxes.

And so, when some thorny issue comes up I might talk to a brother or sister tax pro in Florida or Texas or New Hampshire or Washington State or a smattering of other places around the country, in both red and blue states.

Recently, I was working on a tricky issue relating the Trust Fund Recovery Penalty (to the uninitiated, this weird string of four words refers to one aspect of tax law that properly strikes fear into the hearts of business owners with employees everywhere or, if it doesn’t, either it should or the business owner has already dealt with the issue and taken steps to avoid or solve this problem; see, for example, http://lifelawandtaxes.com/not-just-for-bernie-madoff-or-king-tut-business-owners-build-devastating-pyramids-of-withholding-tax-debt-deducted-from-paychecks-but-not-sent-to-irs/).

After brainstorming a bit on strategy for my Trust Fund Issue, my colleague and I started talking about life, the world, and business, generally.

She complained bitterly (and hilariously) about our still-new president Obama (I couldn’t disagree with her more on this, yet we still are able to find common ground elsewhere and get along just fine – like the Jets and the Sharks go bowling together).

Then, to my surprise, she told me that she is doing less and less tax work.

Honest Analysis Loses Out to Empty Promises

Her explanation: We can’t compete with these tax resolution companies who promise the sun, moon and stars in their advertising and then have telephone sales people who don’t know anything about the tax rules and say whatever the taxpayers want to hear.

She gave an example: I talked to a taxpayer, he makes $200,000 a year, owes $40,000 in tax, interest and penalty, has a federal tax lien filed against him. Owns a house, has a lot of equity in it, she said. Now, she continued, “you know and I know that this taxpayer’s income and assets are big enough that settling for ‘pennies on the dollar’ just cannot happen.”

She added, “I told this taxpayer what was possible, what was likely, and what was not possible. Then, he spoke to one of these telephone sales people who told him, ‘oh, no problem, we can settle this $40,000 debt for $1,000 and get the lien released in 30 days.’”

Sophisticated Analysis: “Not Gonna Happen”

Her sophisticated (and correct, I think) legal analysis of the salesperson’s promise: Not gonna happen. No way.

Despite the reality here, she said, the telephone sales people told a tale that sounded so good the taxpayer could not resist, and so, instead of hiring her, he signed up with the telephone sales person’s company.

She said, this keeps happening again and again.

Tax Problem Gets Worse

She added: And then what happens is these taxpayers who talk to me, but then go with these pie-in-the-sky moon-promising companies, come back to me a year later.

Now, they want to hire me! Now! A year later. The problem isn’t solved. They still owe tax. It wasn’t settled for pennies on a dollar, despite the sweet story of the telephone salesperson sold a year earlier.

Plus, the lien was not released. And in fact, now they owe a lot more because a year has gone by, with interest and penalties accruing.

And, icing on the cake, they don’t have any money left to pay my fee.

So, what am I supposed to do, now represent them for nothing to clean up the mess that an unscrupulous company made worse by first making bogus false promises and then failing to do anything?

Finally, she asked, where is OPR (That’s IRS’s Office of Professional Responsibility)?

Who knows.

Meanwhile, taxpayers are getting fleeced day after day by unscrupulous companies promising too-good-to-be-true solutions that are driving honest professionals who give honest analyses based on their best understanding of the facts and the real rules right out of the business.

Here we are in the thick of tax season and lots of people are getting their shoeboxes full of reciepts together, organizing their credit card statements and cell phone bills, so that they prepare their tax returns or go to their accountant to do it for them.

Some of us — the enviably well organized — may already be done. Maybe they’ve even prepared their returns already. So now, to file now and get it done? Or to wait until April 15th? Certainly you don’t want to be late (or if you have to be late, you want to file for an extension of time to file), but now the question is: on time or early?

What? No Gold Star? Three Ways Filing Early Might Help

Surprisingly, except three narrow situations, in most circumstances, filing early does you no good. You don’t get extra points or anything.

What you might get, if you are owed a refund, is your refund sooner than if you filed later. That’s one of the three situations: get your refund sooner.

The second situation is where you owe back taxes from prior years and are trying to set up a payment plan or an offer in compromise (that is — settle your whole debt for less than the full amount owed — you’ve soon the excessively rosy ads for this program on late night TV and heard about it on the radio, maybe even seen it in Google Adsense contextual advertising on the internet).

If you are trying to set up a payment plan or get an Offer in Compromise, you need to get your tax return filed to get that most recent tax year (now, 2008) included in the deal. Otherwise, it becomes its own separate obligation, and often that only complicates things.

The third situation is just a peace of mind sort of thing: If it will make you feel better knowing that your tax return is prepared, done, filed — signed, sealed, delivered — as Stevie Wonder might say, and as President Obama borrows from to rouse the crowds, that satisfied sense of completion, having that unpleasant chore done and checked off the To Do list could be another reason to file early.

On Time is as Good as Early, Actually, it May be Better

But under the rules, at least as I’ve read them, other than these three situations, filing early puts you in no better position than if you file on the due date, April 15th.

In fact, in one way, it potentially puts you at a disadvantage.

Here’s how: if you file on time, on the due date (April 15th), or after that, the IRS has three years from the day you file your tax return to assess your taxes. Most of the time this process of assessing happens quickly: the IRS reviews your return, and for most taxpayers, the IRS accepts their returns as accurate and agrees.

For example, you say you owe 3,500 in taxes, you had 3,000 withheld from your paycheck and you enclosed a check for $500 with your return — you say you’re “even” and “paid up” and the IRS agrees. You’re done.

But, for some taxpayers, the IRS either disagrees or isn’t so sure. In those situations, it will initiate an audit (or “examination” as the IRS tends to call it). In an audit, the IRS will recalculate and tell you how much it thinks you owe. Or it will say to the taxpayer, essentially, “we think your tax return is wrong — please provide documents to support x, y, or z deductions.”

The IRS has three years to do this audit process, and then assess what the tax bill is.

Or, more exactly, the IRS has three years if you file your tax return on the due date or later. If you file early, say on March 15th, instead of April 15th, the three year countdown clock for the IRS to audit and asses does not start ticking until the final due date, April 15th.

Do You Want to Give the IRS the Gift of Time?

So, by filing a month early, you give the IRS an extra month to think about your tax return and decide whether to accept it as filed, or to challenge it with an audit. If the IRS uses that extra time to decide to audit you, you have done yourself harm by giving the IRS extra opportunity to audit when it otherwise would not do so.

It is unlikely that it happens often. And, in fact most taxpayers, whether individuals or businesses, don’t get audited. But considering how stressful getting a letter from the IRS saying they intend to audit (the letter will likely say “examine”) your tax return, who wants to increase the chance of that happening?

This is counterintuitive. One would think that nothing could be better than just getting this big chore done and over with. But the three circumstances where filing early does you good are narrow. In all likelihood, you’re better off filing on time rather than early.