Here's why you should prepare your taxes now

Taxes may be inevitable, but taxpayers have some some wiggle room with when they file their returns. This year, the IRS opened its filing window in late January and won't close it until April 17. 

Even so, many Americans tend to wait until the last minute to file, with one in seven taxpayers holding off until the last week to send their returns to the IRS. But there are some risks with waiting until the last minute. 

First off, who needs to file a return? Not everyone is required to do so: if you're single and your income last year was below $10,400 or married with total income of less than $20,800 (which is the sum of the personal exemption and the standard deduction), then you'll have zero taxable income to report. That means there's no requirement to file a tax return.

For everyone else, you're required by law to file a federal income tax return. But even if you're not required to file a federal tax return, you may still be required to file a state tax return. Some states require their residents to pay tax on every dollar of income, which means any amount of earned income will require you to file a state tax return.

Below are reasons to start preparing your tax returns now and filing as soon as possible.

Protection against fraud

Perhaps the best reason to quickly prepare and file your taxes is to protect yourself from tax ID fraud. It's one of the fastest growing crimes, and it occurs when your Social Security number is used by another person to fraudulently file a tax return with a request for a tax refund. 

At least one tax scam is on the rise. The IRS says potential victims of a computer scam has soared from a few hundred to "several thousand in just days." Like many other scams, the crooks are using data stolen from tax preparers' computers -- including Social Security numbers, dependent data and even bank account information -- to file refund claims on behalf of the victimized taxpayers. 

Most taxpayers only find out about the fraud when when they try to e-file their return. Instead of receiving confirmation of a properly filed return and tax refund, they learn their return has been rejected because a tax return using their personal information has already been filed.

One way to protect against fraud? File your taxes as soon as possible, according to the IRS. This helps because if a scammer tries to file a fraudulent return after you've already filed, the fake return is likely to be rejected.

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Protection against errors

Another reason to prepare your tax return early is to catch errors in your tax forms such as forms W-2 and 1099s. Take a taxpayer who rolled over her 401(k) account to an IRA in 2017. If this was done correctly, the gross distribution will be reported in box 1 of the form 1099 R, and the taxable portion in box 2a should be reported as zero. 

Yet plan administrators sometimes include the amount reported as the gross distribution in box 1 as the taxable amount in box 2a. This may be because they didn't have the information to confirm the transfer was a direct rollover. It could also be that they simply made a mistake. 

But if the taxpayer doesn't catch this early and request a correction, wrong information will be transmitted to the IRS when she files. After a year or two has passed, the taxpayer will receive a letter from the IRS stating that she failed to report the distribution as taxable income and that she owes more taxes.

A simpler solution: start preparing your taxes early in the filing season, giving yourself plenty of time to catch errors and correct any tax forms before filing. In short, a stitch in time saves nine.

Getting your refund faster

The sooner you file your tax return, the sooner you'll get your refund. To receive it in as little as 10 days, file your tax return electronically and elect to have your refund automatically deposited into your bank account.

But if you expect to owe additional tax on your 2017 tax return, there's also a good reason to prepare your tax return sooner than later. Knowing as soon as possible what will owe the IRS will give you time to prepare your finances for that payment. The deadline for sending the balance of the 2017 taxes owed to the IRS is April 17th, 2018. 

While you can request an extension and delay your filing until October 15th, 2018, you cannot delay making paying what you owe. Preparing a draft tax return can help give you a good estimate of what you owe now will, providing you with time to raise the cash to pay the taxman.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.