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Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.

• CCH Tax Briefing: 2012 Federal Budget Proposals
• CCH Tax Briefing: 2010 Tax Year-in-Review
• CCH Tax Briefing: 2010 Tax Relief/Job Creation Act
• CCH Tax Briefing: Sunsetting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001
• CCH Tax Briefing: Small Business Jobs Act of 2010 (H.R. 5297)
• CCH Tax Briefing: Education/Jobs/Medicaid Assistance Act of 2010
• CCH Tax Briefing: Homebuyer Assistance and Improvement Act of 2010
• CCH Tax Briefing: Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010
• CCH Tax Briefing: Health Care Reform Act
• CCH Tax Briefing: 2010 Hiring Incentives to Restore Employment Act

Amending Previous Tax Returns Has Its Advantages, CCH Says

(RIVERWOODS, ILL., January 2011) – Missed a crucial deduction last tax season that could have saved you some serious cash? Need to fix something on a prior return to make sure you’re in compliance with the IRS? By filling out the Amended U.S. Individual Income Tax Return (Form 1040X), taxpayers may get a second chance at an additional refund and potentially avoid headaches caused by past omissions and mistakes. CCH, a Wolters Kluwer business and leading provider of tax, accounting and audit information, software and services (CCHGroup.com), examines situations where an amended return may be a smart tax strategy.

“The amended return option opens the financial door to a taxpayer’s past,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM. “It enables someone to voluntarily correct an error, add something that had been omitted and change a previous return to reflect a loss. If the adjustment favors the taxpayer, the amended return also serves as a refund request.

Some mistakes and omissions don’t require you to file an amended return, however. The IRS will usually correct any math errors and will send you a refund or a bill for the resulting difference in your tax. If you forgot to attach a form or schedule, the IRS will ask you for additional information.

Homebuyer Refunds through Amended Tax Returns

People who qualify for the homebuyer credit may file an amended return to claim the refundable credit against their 2009 taxes. The popular credit ended for most home sales not under contract by April 30, 2010 and not closed by September 30, 2010. (In a nod to our troops, Congress gave individuals on extended active duty outside the United States until May 1, 2011 to enter into a contract and July 1, 2011 to settle on their purchases).

Homebuyers who made their purchases earlier in 2010 when the credit was still available must take the extra step when filing their 2010 tax return to claim the credit if they have not already done so. They have the option of claiming it on a 2009 amended return or on their 2010 tax returns. In either case, homebuyers claim their one-time credit on Form 5405, First-Time Homebuyer Credit, which needs to be attached to their Form 1040 along with certain other documents, to be submitted to the IRS on paper – electronic filing is not available for those claiming the first-time homebuyer credit.

A first-time homebuyer is defined as an individual who, with his or her spouse if married, has not owned any other principal residence for three years prior to the date of purchase of the new principal residence for which the credit is being claimed. According to the IRS, after 2008, qualified first-time homebuyers may claim a refundable credit equal to 10 percent of the purchase price up to a maximum of $8,000 ($4,000 if married filing separately). In addition, up to $6,500 may be claimed for a home purchased after November 6, 2009 by a “long-time resident.” The homebuyer credit is available to purchasers who either have had no “ownership interest” in a home for the last three years or who have owned a home for five out of the last eight years.

Amended Returns Offer Second Chance

An amended return may also be used to clarify a tax situation that wasn’t all that certain at the time.

For example, after reviewing your taxes it looks as though you’re in line to receive a refund. One of your itemized deductions may be for state income tax, but you might be eligible for an even bigger refund if you take the deduction for state sales taxes instead. (You can’t take both.) However, it will take some time to sort through all your records to see if you’ve collected enough receipts to qualify for the sales tax deduction.

To cover your immediate needs, you can file your return right away, claiming the income tax deduction and using the refund. At a later date, you can add up all your receipts and, if the sales tax deduction produces an even larger refund, you can file Form 1040X to claim the difference.

Time to sort things out can also be an issue when you need to determine that a stock actually became worthless or a debt became uncollectible in a previous tax year. These also are situations that can be addressed through amended returns.

Use Amended Returns to Make, Change Elections

Amended returns are also a common way of making or changing certain tax elections, or choices of tax treatment. Dozens of elections are available relating to business, farming, foreign income, residency status and other special situations.

For example, if one spouse is a nonresident alien, a couple normally cannot file jointly, but they can elect that status for a year in which the spouse becomes a U.S. resident. If they do not do so on their original return, they can do so on an amended return.

“To be certain about changing a tax election on a past return, taxpayers should either consult a qualified tax advisor or do some additional research to determine if a specific election can be changed and the deadline for filing an amended return to make the change,” said Roth.

Changing Filing Status

An amended return is usually required when a couple decides to annul a marriage. Unlike a divorce decree, an annulment looks backward and undoes a marriage from its beginning. Since unmarried couples don’t qualify for joint filing status, any joint returns filed for prior tax years have to be “undone” by the filing of amended returns as single filers.

“This is a rare circumstance in which people who have filed a joint return can literally go back into the past and change their tax filing status,” Roth said. “Normally, the filing status can’t be changed after a joint tax return has been filed, but an annulment introduces different options for an amended return.”

If a couple has filed jointly but wants to change to married filing separately and the filing deadline hasn’t passed, the two spouses must take two different paths. The spouse with their Social Security number appearing first on Form 1040 must file Form 1040X. The other spouse files a new Form 1040.

Amended Returns for Losses

Amended returns can also come into play if casualty losses occur in an area determined by the President to be a “disaster area.” In this case, a property owner can elect his or her losses in the year immediately before the tax year when the disaster occurred.

This allows some taxpayers who suffered property losses in 2010 to get some quick relief by applying their loss to their already-paid 2009 tax bills to receive their refund checks. Those incurring business losses may also benefit from filing an amended return. Usually, a net operating loss can be carried back to the previous two tax years, and carried forward to be applied against income in the succeeding 20 years. Carrying the loss back may generate a refund. Stimulus legislation adopted in 2009 allowed businesses with net operating losses for years ending in 2008 or 2009 to be carried back up to five years.

“If you carry back a loss, you must also recalculate any deductions you took that were tied to adjusted gross income, such as a deduction for medical expenses,” Roth added.

No E-filing Option for Amended Returns

While an amended return allows you to bring your tax status up to date – it has to be done on paper. Form 1040X is one of the few IRS forms that can’t be filed electronically. Your tax software may allow you to fill out and print the form, but you’ll have to send a paper copy to the IRS. It can take the IRS 12 weeks to process the form and taxpayers can call the live-answer line, 1-800-829-1040, for a status update. If you’re due a refund, look for your check in the mail. Electronic deposit is not available when you file an amended return.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).

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