100weight

A quick question with regards to previous year tax returns.

After doing this years tax return, I have discovered that our previous years returns are slightly incorrect. The actual amounts are okay, but the schedule E and associated form 8582 are wrong. Our "unallowed loss" that gets carried forward each year has been very wrong.

Should I submit amended tax returns to ensure that our "unallowed loss" is correctly documented? Or do I just do the calculations for the previous years and use the correct amount on this years form?

I am concerned that by submitting amended returns to correct two forms, the IRS will deem them frivolous and fine us.

Thanks
CWT

JAJ

As far as I am aware, you don't have to amend your returns (especially if the tax impact is immaterial) but you cannot take advantage of the error in this year's return. For example, see the following article:
http://www.cpa2biz.com/content/media...dedReturns.jsp

(extract)
"Despite the references to amended returns in the regulations and IRS publications, a taxpayer is under no legal obligation to file an amended return to correct a good faith error in a prior open year. However, the taxpayer cannot take advantage of the error made in prior years in subsequent years. Otherwise the taxpayer will have violated the legal obligation to file a correct and accurate return using the facts and circumstances that are then known to be true. "

100weight

Thanks for the prompt reply JAJ.

If I'm reading your link correctly I have three options:
a) File no amended returns and use the incorrect figures for this years return
b) File amended returns and use the correct figures
c) File this years return using the correct figures and include an explanatory note explaining the problem.

I'm thinking of option c as it would make a good refund difference.

CWT

JAJ

Option (a) doesn't work, since now you know the previous returns are incorrect, to use the incorrect figures on a new return would be fraudulent.

There is also option (d) which is to file this year's return with the correct figures, but without a letter of explanation. Not clear how you would attach such a letter/explanation anyway, the forms don't (as far as I know) have open fields for this kind of information, and if you file electronically does it allow you to attach additional information? A tax professional could let you know more about this.

100weight

OK, thanks for the help.

CWT

md95065

Errors such as the one that you describe - particularly where they do not result in any underpayment of taxes -do not a "frivolous" tax return make ...

Now, if you file a return showing that you owe no Federal income tax on the grounds that the federal income tax is unconstitutional that is what the IRS will regard as a "frivolous" filing.

Just file the amended returns and move on ...

Jscl

File the amended returns, then use the corrected figure with no issue in future returns.

(the taxpayer cannot take advantage of an error on a previous return thing just means you can't take advantage of an error you made in a prior year that now works in your favour)

JAJ

Unclear why an amended return needs to be filed in order to do that, unless the corrected figure is more favorable to the taxpayer.

100weight

Just checking. If (when) I do file amended returns, do I just need to file the forms that were incorrect (as the changes don't affect the actual 1040 at all) or do I need to file the ENTIRE return including the forms that are correct.

Ta
CWT

JAJ

As always, check with your tax adviser, but as far as I am aware you have to file a 1040X and include everything. You also must include anything else that has changed since you filed your return. Read the instructions for 1040X for specific information.

However, you may wish to read the following before you proceed with amendments:
http://www.forbes.com/sites/robertwo...g-tax-returns/
http://www.forbes.com/2010/05/28/10-...bert-wood.html

An amended tax return always gets examined manually (that's why it is on paper) and the risk of audit is generally higher. It can open any element of your return to audit.

It's also unclear why you are saying this will get you a refund, this is not a consistent message compared to what you said earlier in the thread. That can also increase your audit risk, if you do claim a refund now.

Jscl

You file 1040X which lists the original numbers, new numbers and difference, then (I think, check the form) you only file the pages that are affected by the change.

JAJ, because if it comes to any sort of audit you're going to want to have a consistent record with the IRS, you don't want "their figures" and "my figures" to be different. I've no idea how much data is stored with the IRS, but now everything is digitalised I also wonder whether it's something that would cause an error flag without an audit, as the figures would not be consistent from year to year.

We did a similar thing when I had forgotten to include a loss on a worthless stock on our return. Because we'd already reached the $3K loss maximum the capital loss is carried over to the next return (and if you don't make more loss that year you can take $3K then). The amended return was really simple (they even have a box on there to write a description of what was wrong) and much easier on the brain than just using a different capital loss carryover figure the next year and wondering what would happen!

JAJ

It's a judgement call. The difference in your situation is that you wanted to increase your carry-forward loss. If the opposite had applied, you could have simply decided not to take advantage of a prior error in current/future returns.

I'm not saying there's a right or wrong answer. I am suggesting that amending a tax return is a more serious step than people believe, and that it's not always necessary. After that - specific situations should be discussed with a tax preparer.

100weight

That's why I'm asking here


I have and I haven't. I need to discuss with the missus as to whether to risk it or not.


This is what makes me hesitant to do the amendment or just correct it and hope for the best.

We have had big refunds the past two years, and this year is no exception. However, if I use the correct loss figures we get a $2k larger refund. And that is not something to be sneezed at!

CWT

JAJ

It's normal to get a refund, because in most cases tax withholding doesn't take into account itemized deductions.

If you want to establish a carry-forward loss that is higher than that shown on your prior returns, increasing your refund for 2012, then you probably should file relevant amended returns. It's basically down to a choice between a refund coupled with a higher audit risk. However, if your documentation is all in order, then how much of a problem is it if you are audited?

If you're expecting an online forum to give you advice on balancing these risks, you are likely to be disappointed. Only an experienced tax preparer, who has seen many of these situations before and is close to the actual processing culture of the IRS, could give you something more specific.