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Making Amends With Taxes Can Bring Rewards

(RIVERWOODS, ILL., APRIL 17, 2002) – If you drop your tax return in the mail or zap it off to the IRS electronically and only then find out that you could have taken some extra deductions, remember that you earned some income you didn’t report or realize that you would have been better off if you changed your filing status, all may not be lost, according to CCH INCORPORATED (CCH), a leading provider of tax and business law information and software. You can usually put things right again by filling out and filing an amended return on Form 1040X.

Amended returns not only correct mistakes but can open up previous years’ taxes for adjustment, according to John W. Roth, JD, federal tax analyst for CCH.

"An amended return is the taxpayer’s way to correct an error, add something that’s been left out, change a previous return to reflect a loss or change a choice that the taxpayer made on a return. If the change is in the taxpayer’s favor, the amended return also acts as a request for a refund," Roth said.

It may come in especially handy this year. With changes in the tax law made mid-filing season and a new line on the basic income tax forms causing plenty of confusion, more taxpayers may see the need to file an amended return.

Amended returns can be in order when a change in the tax law changes the "rules" for a return that’s already been filed.

For example, if you paid a lot of money to lose weight in the past few years, the federal government may owe you a tax refund – if you file an amended return. The IRS has recently ruled that the cost of weight-loss programs for people diagnosed as obese by their doctors qualifies as a medical deduction. Previously, the expenses were deductible only if the taxpayer suffered from a disease such as hypertension. Due to limits on taking itemized medical deductions, not everyone who participated in such programs will be able to benefit from the ruling. As a general rule, those whose expenses qualify can amend their 1998 or later returns.

Also, the recently passed Job Creation and Worker Assistance Act changed some of the rules for returns already filed.

For example, equipment purchased after September 10, 2001 qualifies for the 30-percent bonus depreciation. If people entitled to the bonus depreciation have already filed their 2001 returns, they can amend those returns to claim the extra depreciation and get some of their taxes back, or receive a larger refund.

A forgotten deduction or piece of income is one of the most common reasons for filing Form 1040X, but an amended return can also be used to clear up a tax picture that wasn’t previously certain.

Suppose, for example, you filled out your Form 1040 in January. You figured that if you made a $2,000 IRA contribution by April 15, you would get a hefty tax refund – but until you got the refund, you weren’t be able to make the contribution. You filed your return claiming the full IRA deduction, but by the time your refund check arrived, you had unexpected medical and car-repair expenses and won’t be able to afford the full IRA contribution. Filing an amended return before April 15 will undo the transaction.

Sometimes, too, it may take a while to determine that a stock actually became worthless – or a debt became uncollectable – in a previous tax year. These, too, are situations that can be addressed through amended returns.

Amended returns are also a common way of making or changing a tax election – a choice 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.

"Taxpayers will have to do some research or consult a qualified tax advisor to learn how long they have to make or change an election by filing an amended return," Roth noted. "Sometimes they have up to three years from the original due date of the return, sometimes up to the original due date plus extensions, sometimes only up to the due date without extensions."

Changing Filing Status

Amended returns are often required when a couple has their marriage annulled. 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 change their filing status," Roth said. "Normally, after a joint return has been filed, the filing status can’t be changed – for example, to married filing separately – unless the amended returns are filed before the due date for that year."

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 whose Social Security number appears first on Form 1040 files a Form 1040X. The other spouse files a new Form 1040.

Amended returns can also come into play if casualty losses occur in an area determined by the President of the United States to be a "disaster area." In this case, a property owner can elect to claim his or her losses in the year immediately before the tax year when the disaster occurs. This allowed some taxpayers who suffered losses in 2001, for example, to get some quick relief by applying the loss to their already-paid 2000 tax bill and getting a refund check.

By contrast, taxpayers with 2001 casualty losses outside of presidentially designated disaster areas have to wait until they file their 2001 returns to see any tax relief as a result of their losses unless they are able to reduce their estimated tax payments.

Business losses can also give rise to amended returns. A net operating loss can ordinarily 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 can produce a refund.

"If you carry back a loss, you also have to recompute any deduction you took that was tied to adjusted gross income, such as the deduction for medical expenses," Roth observed.

The latest tax law gives taxpayers the right to carry a net operating loss for 2001 back five years rather than two, which would be attractive if a business has suffered losses for the last two years but was profitable and paid taxes in previous years.

As an alternative to filing an amended return, taxpayers who are due a refund based on a carryback can file what’s known as a tentative carryback adjustment to claim it. The tentative carryback adjustment is usually processed more quickly than an amended return, but Roth suggests that taxpayers seek professional help to determine which procedure best suits their needs.

Amended Returns Not Electronic

While an amended return allows you to bring your tax status up to date, the actual process of filing takes you back to an earlier era of IRS processing and service. Form 1040X is one of the few 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 Service 12 weeks to process the form, and don’t bother calling the automated tax line for a quick check on the progress. You must call the live-answer, 1-800-829-1040, number instead. If you’re due a refund, look for your check in the mail. Electronic deposit is not available when you file an amended return.

"There’s certainly a benefit to getting things right the first time around, but it can be worth the wait when an amended return puts money back in your pocket," Roth said.

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

So far this year, over a million people have made a mistake relating to the rate reduction credit—but even if you know you are one of them, don’t file an amended return just yet.

Many people are making mistakes on the line on their tax returns intended for taxpayers who did not get a full rate reduction credit last year to reflect the introduction of the new 10-percent tax rate. Many people who should leave the line blank are entering the amount of the full credit they already received last year. Others, who should be making entries on the line so they will receive the credit, are leaving it blank.

The IRS says that they are catching most of these errors and will correct them. Taxpayers are urged not to file an amended return until they see if the IRS has corrected the error while processing their original return.

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, insurance, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at cch.com. The CCH tax and accounting destination site can be accessed at tax.cchgroup.com.

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