How to Navigate Amending Returns for Your Client

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Jay Leno once joked, “Today is April 1, April Fools’ Day, a day when people try to fool their friends and relatives … not to be confused with April 15, when people try to fool the IRS.”

While we would never advocate fooling the IRS, it is possible for clients to get tricked by all the tax laws and not file correctly by the ultimate deadline, Oct. 15. The IRS form used to correct a filed tax return is the 1040X. The general rule is that the IRS allows three years from the filing date of the original 1040 to file a 1040X.

Interpreting 4 million words of tax code takes revenue rulings, publications, tax court cases, private letter rulings and legal memoranda to sort out the gray areas that can easily fool our clients. There are several reasons to amend a 1040, time limits in which to file an amended 1040, a way to make an amended 1040, a way to track an amended 1040 and at least one absolute reason to amend a 1040. Let’s explore these now.

Reasons to Amend While it costs the client more money and opens the return up for an audit three years after filing, taxpayers encounter several reasons to file a 1040X. Taxpayers may realize a stock is worthless, a net operating loss carryback is needed or a correction is needed based on a court ruling. In addition, the need to amend is often based on a letter from the IRS indicating missing income based on a Form 1099 not matching.

Marital filing status may need to be corrected. Same-sex couples who filed a single return while married may amend the return to file as married. However, they are not required to change the filing status on a prior return, even if the 1040 is amended for another reason. In many cases, the “marriage penalty” of the joint tax rates reduces the financial incentive to amend prior years. Tax software will provide a quick analysis if a client is interested.

Time Limits to Amend A taxpayer has three years from the tax day (April 18 for 2016) to file an amended return, unless it is extended. Afterwards, a taxpayer has three years from the date it was filed.

There are several exceptions for filing Form 1040X beyond the three-year time limit. Filing Form 1040X based on a bad debt or worthless security generally must be filed within seven years after the due date of the return for the tax year in which the debt or security became worthless. Filing Form 1040X to claim or change a foreign tax credit or deduction for foreign taxes generally must be filed within 10 years from the due date for filing the return for the year in which the foreign taxes were actually paid or accrued.

How to Amend Form 1040X is pretty straightforward. You provide the originally filed amount in column A, the correct amount in column C and the changed amount in column B. Any forms that support the change need to be attached. Provide an accurate note in Section III describing the reason for the amended return.

Professional tax software, such as Intuit® ProConnect™ ProSeries, will populate the original amounts in column A and bring forward the changes you make on the supporting forms, including an increase in interest earned, for example. Conveniently, the state amended tax return may also be completed at this time.

Do not include any interest or penalties on Form 1040X because these are adjusted by the IRS. It is necessary to file a separate Form 1040X for each year you are amending. Retro alert: the 1040X is filed on paper.

Tracking Your Amended Return A taxpayer may need to wait eight to 16 weeks for a refund. Use the Where’s My Amended Return application on IRS.gov to track the status of an amended return. It can take up to three weeks from the date mailed to show up in the IRS tracking system.

Now, for the reason to absolutely file an amended return: during an IRS audit, you may find that a client has not taken earned deductions or credits. The IRS examiner may want to consider them in his or her final analysis. I have always found it best to file amended returns to formally document the deductions. While filing an amended return extends the time period that the return is open for an audit, it is not known to subject the return to a greater incidence of being flagged for an audit.