DO NOT AMEND

It appears, according to IRS Commissioner Chuck Rettig, that the IRS will automatically process refunds for taxpayers who have already filed their 2020 income tax returns and claimed the full amount of unemployment benefits received as taxable income.  

 

As I explained in a previous post (click here) - “The American Rescue Plan . . . exempts from federal taxable income up to $10,200 in unemployment benefits received in 2020 if your “household” modified AGI is less than $150,000.” 

 

“Do not file an amended return at this time,” Rettig told a congressional panel on Thursday. “We believe that we will be able to handle this on our own. We believe that we will be able to automatically issue refunds associated with the $10,200.”

 

Rettig explained that the IRS would soon officially release details for taxpayers about how to proceed.

TTFN

IRS UPDATES

Here is the latest news on the stimulus payments and COVID-19 federal tax relief -

* If you don’t file a tax return due to low income and you do not receive Social Security or Railroad Retirement benefits you can use the new "Non-Filers: Enter Your Payment Info Here" application at the IRS website to provide simple information so you can get your payment.

Go to https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here.

* The IRS will also be introducing a "Get My Payment" application at the website in mid-April to check your payment status, confirm your payment type (direct deposit or check) and enter your bank account information for direct deposit if the IRS does not have this information from your tax return.  I will let you know here when this application is available.   

* Per recent IRS Notice 2020-23, the June 15 deadline for federal estimated tax payments is postponed to July 15, and the deadline for filing an amended 2016 federal tax return to claim a refund, normally April15, is extended to July 15.

TTFN

AN AFTERTHOUGHT

After writing and publishing Monday’s post on amended returns I was reminded of a story from the early days of my career.

I have been preparing 1040s for 40 tax seasons now.  And I have been taking some form of CPE (continuing professional education) since almost the beginning – not because of any requirement or any college credit it provided, but because I wanted to learn.

Back in the 1970s, before there was a National Association of Tax Professionals or any other such organization, I took several evening tax courses at the New York University School of Continuing Education, all taught by practicing tax professionals.

In one course on 1040 issues, I forget the name and scope, the “professor” told the class that, because of some internal procedures at the IRS, an amended return filed very close to the statutory 3-year deadline would almost never be questioned by the Service.

This professor said that he would file his 1040 each year with minimal employee business expenses and 3 years later, weeks before the April 15^th deadline, he would amended the return to claim the rest of his ebe (I assumed at the time that he meant he claimed the legitimate expenses that he did not include on the original filing – and not that he claimed excessive expenses because he knew he would not be questioned).

I do not know if the same internal procedures still exist within the IRS, but I certainly would not recommend doing what the “professor” did.  You should claim all of the deductions to which you are legally entitled on the original filing of your return.  And if you discover an error soon after filing your original return you should certainly not wait three years to file an amended return to claim an additional refund.  File the 1040X ASAP, waiting only for the original refund to be received or the original return to be processed.

What I would do, just in case, is, if you discovered the error 2+ years after filing the original return, wait until a month before the April 15^th (or whatever) statutory deadline to submit the Form 1040X.

As a point of information, the longer you wait to file an amended return to get an additional refund the more interest you will be paid by the IRS.  And the IRS pays a higher interest than any bank.

OOPS!

I inadvertently deleted a comment that had been posted to IT AIN’T NECESSARILY SO that, while it had absolutely nothing to do with my post, posed a good question.  I apologize for the deletion – and will herein respond to the question.  

The reader asked –

“If you have to amend several years of taxes, will this lead to an audit?”

In almost 40 years of preparing 1040s I have never seen a Form 1040X (an amended return) audited - or even questioned.

I think one of the reasons is that, in addition to providing a detailed explanation of the changes made on the 1040X, often actual documentation of the changes is attached to the amended return (which I recommend).  So any potential questions are already answered.

I think it is an “urban tax myth” that filing an amended return will substantially increase one’s chance of an audit.

What I do recommend to clients who are amending several years of taxes is that they mail the oldest 1040X first (i.e. if amending 2008, 2009, and 2010 mail the 2008 Form 1040X first).  When the refund for that return is received mail out the next (i.e. 2009) Form 1040X.  And when that refund is received mail out the next (i.e. 2010).  If you are not requesting a refund, allow at least 8 weeks between the mailing of each return. 

Generally you have three (3) years from the due date of the return being amended to file a Form 1040X – although there are situations when you can, and would want to, file amendments for earlier returns.  For example, you have up to seven (7) years to amend a return to claim a loss on worthless stock.

If you find an error on a previous return, and that error affects subsequent returns or the error was repeated on subsequent returns, you should submit amended returns.  Do not be afraid that you will be automatically audited.  If your amendment is legitimate, and you are one of the truly rare “amenders” who are actually questioned, you should have nothing to worry about if you have proper documentation for the change(s). 

As I have said in the past, while an audit is not something you would want, if your return is properly and correctly prepared, and you have documentation for your income, deductions and credits, there is no cause for fear and concern.  In such a case the audit is just an inconvenience.  You should not make tax decisions based solely on the possibility of being audited.    

TTFN

WHEN GOING TO A NEW TAX PREPARER BE SURE TO PROVIDE COPIES OF PRIOR YEARS’ RETURNS.

Back when I accepted new work (FYI - I no longer accept new 1040s, or even returning lost lambs, and do not accept any corporate or partnership work, period) the first thing I would ask a new 1040 client was to bring me was copies of the previous three (3) years’ federal and state income tax returns.

One reason was so I could check for errors made by the previous preparer that I could “fix” by preparing amended returns. My mentor and I found that you would get the new client for life if you could amend a prior year’s return for an additional refund. This worked a lot better back in the day of Income Averaging and other “rabbits” we could pull out of hats. (This review of prior years' returns is that on which I base my contention that over the years I have found more errors on returns prepared by CPAs than on self-prepared returns.)

But the most important reason to review at least last year’s returns was to see if there were any unique deductions and credits to look out for and any carryovers that would affect the current year’s return. There are a multitude of reasons why a preparer may need information from past years returns of new clients in the process of completing current returns.

I cannot imagine a taxpayer going to a new preparer for the first time and not being asked to provide copies of prior returns.

But there apparently are many preparers out there, especially those employed by fast food tax preparation chains, who do not ask for past returns. When reviewing the 1040s of lost lambs who had returned to the fold in the past I have discovered that carryovers from returns I had prepared were not “carried over” to the returns of the new preparer, resulting in an overpayment of tax.

Several years ago a representative of the Government Accountability Office spoke at the IRS Tax Forums about the sting operation it ran which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors” (one of the initial factors that led to the current tax preparer regulation regime). The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

I asked the presenter if any of the alleged “tax pros” approached in the study had asked the GAO undercover “client” for a copy of the previous year’s return. I was told that in none of the 19 instances did the fast food preparer want to see the prior return.

As an aside comment, the GAO agents also discovered unethical sales practices related to Refund Anticipation Loans (RALs).

The most common carryover is the capital loss carryover. The maximum deduction for a net capital loss is $3,000. Net losses in excess of $3,000 can be carried over, and deducted at up to $3,000 per year until all used up.

A recent article in one of the National Association of Tax Professionals publications I was reminded that if a tax preparer forgets to carryover a net capital loss all is not lost, even if the omission is discovered for a “closed” year.

Generally a taxpayer has three (3) years from the due date of a return to amend that return to claim an additional refund. At this writing the 2010, 2009, and 2008 Form 1040s are “open”. One can no longer amend a 2006 return to claim an additional refund.

According to TC Memo 1983-318 a taxpayer who did not claim a capital loss carryover in a closed year, either the year the loss was created or a subsequent year, can claim a carryover deduction in open years.

The example used in the NATP article stated that a taxpayer had a $20,000 capital loss in 2005 that could have been carried forward (apparently a net loss of $23,000, $3,000 of which had been claimed on the 2005 return) but was not. No deduction was claimed in the subsequent years.

In this case tax years 2006 and 2007 are now closed. If we assume there were no capital gains, or capital gain distributions, reported in 2006 and 2007, the taxpayer would have to reduce the $20,000 by the $6,000 that could have been deducted in 2006 and 2007 (although they were not) and enter a $14,000 capital loss carryover on the Schedule D of a 2008 amended return.

The taxpayer would not only get the benefit of at least a $3,000 reduction in gross income, but, as the capital loss deduction would reduce AGI, could also increase a laundry list of credits and deductions that are phased-out or lost altogether based on AGI.

Another important carryover is the “tax basis” from non-deductible contributions to a traditional IRA reported on Form 8606. Once you file a Form 8606 for the first time to report a non-deductible contribution you should continue to file a Form 8606 each and every year thereafter, even if no non-deductible contributions are made in a year, to maintain the carryover balance so that it is readily available when you begin to take distributions from an IRA.

You may have made a non-deductible contribution to an IRA in 2004. No additional non-deductible contributions were made in 2005 through 2010. If no Form 8606 was included in the 2005 through 2010 Form 1040 filing, to carryover the IRA basis amount, then when you change to a new tax preparer for your 2011 return, a year in which you took a distribution from an IRA account, the new preparer would have no way of knowing about the 2004 non-deductible contribution and would claim the entire IRA withdrawal as fully taxable, causing you to pay unnecessary federal income tax.

So if you happen to change tax preparers for 2011, for whatever reason, be sure to give the new preparer copies of your 2008, 2009, and, most important, 2010 tax returns (and, to be honest, I would also recommend not going to a fast food tax preparation chain)!

TTFN

ADDITIONAL OBLIGATIONS

Last week I discussed, in a 2-part post, my legal and ethical obligations, responsibilities and requirements, to my practice, my clients, and the IRS and state tax authorities, as a paid tax preparer.

What if, while reviewing a prior year’s return, I discover an error made by the client or another tax preparer – either in favor of the client or in favor of the government? Or if, after preparing a tax return myself, I discover an error or omission, either on my part or made by my client? What are my legal and ethical obligations, responsibilities and requirements in such a situation?

If I discover an error on a return, regardless of who prepared the return, I am obligated to report the error to the client and advise him/her that he/she should file an amended return. That is the extent of my legal and ethical obligation. I am under no obligation to prepare or file an amended return, nor am I under any obligation to notify the IRS or state tax authority of the existence of the error. All I must do is inform the client that the error exists and that an amended return should be filed to correct the error.

If the client asks me to prepare an amended return I will gladly do so. If the client does absolutely nothing that is not my problem.

Let me quote from IRS Publication 470 –

“Any unenrolled preparer who knows that the client has not complied with the revenue law, or that the client has made an error in or omission from any return, document, affidavit, or other paper that the client is required by law to execute in connection with any matter administered by the {Internal Revenue} Service, shall advise the client promptly of the fact of the noncompliance, error, or omission.”

If I discover “after-the-fact” that I have made an error on a client’s tax return I will automatically prepare and send to the client an amended return(s) free of charge. Whether or not the client actually submits the amended return(s) is of no concern of mine. If there is a balance due on the amended return(s) and the client submits the return(s) with the additional tax – that is fine. But if the client simply files the return away and does not pay the additional tax due – that is also fine. It is his/her choice.

If, while attending a continuing education class, or after reading a blog post or article, I discover that I did not claim a deduction or credit to which a client was entitled on a return I prepared, I will automatically prepare an amended return and send it to the client. If I had to prepare an additional form or schedule that was not filed with the original return to claim the deduction or credit I will bill the client for the additional amount I would have charged if I had filed the additional form or schedule with the original return.

If, as occasionally happens, Congress passes a tax law change, or the Tax Court issues a decision, or the IRS has a change in heart, that is retroactive to “all open years”, and this change would generate an additional refund for a client, I will automatically prepare amended returns for all applicable “open” years and bill the client the normal fee for an amended return and appropriate additional forms or schedules.

TTFN