by Gerald V. Krach, CPA
If you filed an income tax return and discovered later that an error was made, you will need to file an amended income tax return to correct the error. An amended return will allow you to either pay the extra tax that you may have left off your original return, or even better, request the refund that you were due because of the error. The tax form 1040X is not a difficult form, but it is different than the customary 1040 filed every year. The 1040X form is a three-column form that allows you to place the original file numbers in the first column, the adjustments in a second column, and the correct figures in the third.
What can cause the need for an amended return?
Sometimes you just forget to claim an item of income. It can be as simple as a savings account at a local bank that you forgot had earned some interest during the year. Bank savings accounts don’t pay much in interest to begin with, and you may not have believed that you earned enough to receive a 1099 interest statement from the bank. If you received a statement, you must enter it in the tax return.
An omitted item can be a form W-2 that came from a job you only had a couple of months during the year; or it may be a retirement income statement from your IRA plan as this is the year you retired. The 1099-R from an IRA company or pension plan may be a new item to you and can be easily overlooked.
Another reason for an amended return is the receipt of a corrected 1099 from an investment brokerage account. A late or corrected brokerage account statement has become a common occurrence in the last few years. The deadline given to the brokerage companies has been extended by the Internal Revenue Service to help reduce the number of amended returns filed in the past. The brokerage companies lived by a January 31st deadline that the IRS has established for documents that are needed to allow taxpayers to prepare their tax returns. The deadline never provided enough time for the brokerage company to accumulate correct data. Regardless, the IRS held firm that the January 31st deadline still had to be met by the brokerage company. This hard-fast deadline quite often created incorrect documents which had to be corrected and sent to the taxpayer after the taxpayer’s filing deadline. These corrected statements then created a problem for the taxpayer who had to file an amended return. Common sense finally prevailed and the Internal Revenue Service gave an extension of time to the brokerage companies to get their data correct prior to issuing the original 1099 to the client.
Of course, it is not only the brokerage companies that may have to send a corrected or late income document to the taxpayer. Lately though, it is the most common occurrence. You may periodically receive a corrected 1099 from a local bank for interest income on your account or a corrected W-2 from your employer.
What about deduction errors? People can forget to claim a deduction more so than an item of income. It is quite common that people will donate money to a charity and forget to claim the deduction on their return. The gift can be claimed late, and an adjustment can be made to the total deductions taken on the return, thereby increasing your refund.
A mathematical error can also be a cause for an amended return. Addition and subtraction errors are less common these days due to the advent of tax software and computers. Some people still do get the paper tax form out and calculate the income, deductions and tax by hand. This old school way of hand calculation is slowly dying more so every year.
The computer can help the taxpayer catch human input errors, but not always. Tax software does not catch the duplication of an income item or a deduction if it is entered incorrectly in the process. There is an adage in computer input…. garbage in-garbage out. If you don’t enter the information properly, then what you get out will be an incorrect number. The same income item could be entered in two different places during the computer input. Quite often the error is not found until the return has been filed with the Internal Revenue Service. You will have to amend your return to reduce the income and get a refund of your overpaid tax.
Should an income item be accidently omitted from the return, a correction notice from the IRS computer is likely to appear in your mailbox. On the other hand, if you duplicate an item of income on your tax return, the IRS is not likely to notify you of that error. Therefore, you better find it on your own!
The IRS has placed a statute of limitations of three years on the timing of filed amended income tax returns. If you wish to file a corrected income tax return to receive a refund, you must file it within that three-year period. Returns filed after that three-year period will be corrected but will not receive any cash back to the taxpayer. If the amended return results in a refund due to you, then the IRS will pay you interest on the refund amount from the original due date of the return. Yes, amazingly the government will pay you interest.
Should the amended return have a balance due, then the IRS will expect payment (past the three-year statute of limitations or not) and will charge you interest. If you amend the return and correct it prior to the IRS finding the error itself, then you will probably not be penalized. Of course, the size of the balance due could dictate whether a penalty is in order or not, and the statute of limitations usually does not work in your favor.
According to the IRS web site, the amended return will take up to three weeks to be entered into the government system. Once received, it may take up to another three months to process. The IRS web site, www.IRS.gov has a tracking system called “Where’s my amended return?” that will help you keep tabs on the progress.
An amended return will probably trigger an obligation with your state of residence as well. Since most state income tax returns start at the federal adjusted gross income line, chances are good that you must also amend your state filed income tax return. If you had to make a change to the federal return, then you will have to make a change to the state.
If you have any questions or require any assistance, please contact our office.