6 Reasons to File an Amended Tax Return

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You probably just finished filing your tax return for 2011 and you’re thankful that it’s done for another year. The last thing you want to think about now is amending the return you just finished. Unfortunately, there are many times that you need to amend your return and doing so will be worth your time.

Some taxpayers are worried that filing an amended return will increase their chances of being audited. Amending the return will focus the IRS’s attention on your return but it will also extend your exposure to their challenges. The IRS looks back three years from the date you file a return. When you amend your tax return you reopen the three-year window.

Millions of amended tax returns are filed by individual taxpayers each year. The reasons they amend vary, but the motivation is because it often can put money in their pocket. Here are some of the most common reasons to file IRS Form 1040X.

1. Corrected 1099s or W2s
These forms are sent out to taxpayers by financial institutions (banks & brokerage firms), investment partnerships, employers, and places you have worked for on a self-employed basis. The deadline for sending these documents was February 15th this year. 1099- DIVs had an extended deadline of February 28th. The IRS penalizes issuers if they miss the deadline. The issuer may not have complete information in time to make the deadline. They will send one out and then send a corrected copy when information is complete. It’s not uncommon for issuers to resend a corrected form months after sending the original. Although the corrected form may create only a small change in your tax liability,you still need to file an amended return or you will not match the IRS records.

2. Windfalls Received Prior to Filing Deadline
Sole proprietors, S- Corporation shareholders, or members of a partnership can make pension or profit-sharing contributions for one year with money they receive in the following year. These contributions can be made up to the filing deadline including extensions. You could use a windfall received in 2012 to fully fund these plans for 2011. This would retroactively give you a larger deduction and entitle you to a refund.

3. Overlooked deductions
You go through your records and discover you missed a sizable deduction such as a charitable contribution. You can amend your return to claim the deduction.

4. IRS rules change
Sometimes the IRS clarifies a rule or a court ruling that could liberalize a tax break affecting your return.

5. Miscalculating your tax liability
Investors occasionally miscalculate their cost in an investment. This can happen with mutual funds or stocks that reinvest their dividends. Taxpayers count only their original purchase price and forget that reinvested dividends also add to their cost. They realize the actual gain is much lower than the amount reported to the IRS.

6. Recharacterizing a Roth Conversion
Converting a Traditional IRA to a Roth IRA creates a taxable event in the year of conversion. That taxable event can be reversed up to the taxpayers filing deadline including extensions. Taxpayers that did IRA conversions in 2007 saw a lot of their account value erode when the market dropped in 2008. You can recharacterize the conversion and amend your return to recover taxes paid on the conversion.

Filing an amended return is not necessarily complicated. If only one or two calculations have to be changed, it shouldn’t be a big deal. The amendment is basically a two-step process 1) preparing a new return along with any additional schedules that apply and 2) preparing IRS form 1040X.

  • Preparing a new return. The new return will be prepared on IRS form 1040 even if you originally filed your return using 1040EZ or 1040A forms. You will need to pull information from lines on the 1040 to match up line items on Form 1040X. Include all necessary schedules that are being added or revised so the IRS has a complete set of information about the changes you are making.
  • Prepare 1040X. You will need a copy of the original tax return you filed and new 1040 you just prepared. Form 1040X summarizes information from your original return and the revised return. Completing a 1040x is nothing more than transferring information from both returns. Form 1040X is a generic form and can be used for any tax year. Just write the tax year you are amending at the top of Part B. In Part C you will summarize the changes being made. You can type up a separate statement if you need more space than what’s provided. It is not uncommon for the IRS to reject an amended return because the explanation was insufficient. Be concise and explain the changes you are making and the documentation you provided to back up the changes.

No one likes to deal with the IRS and taxes, but you could be leaving money on the table by shunning a 1040X. If the total amount of tax you owe is smaller than your original return, the IRS will refund the difference. However, filing an amended return is the right thing to do if the correction results in additional tax owed. The IRS will add interest to the amount if you amend the return after your filing deadline. It is rare that they add penalties. Correcting the mistake early will save interest and could avoid penalties.

Rick’s Insights

  • Amending your tax return does not increase your chances of being audited.
  • You may be entitled to a larger refund when you amend your return.
  • Correcting mistakes with an amended return can save interest and penalties on issues the IRS would catch anyway.

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