An amended return is filed with the tax authority to make corrections to a previous year’s tax return. The tax return’s amended version can increase tax benefits or tax liability, depending on the amendment.
To file an amended return in the US, an individual must fill out a 1040X form, and a corporation must fill out a Form 1120X. The statute of limitations on amended returns is the later date of three years after the original return due date or two years of the reduction of tax liability.
An individual taxpayer can file an amended return by filling out a Form 1040X.
The statute of limitations on an amended return is the later date of three years after the original return due date or two years of the last tax payment.
Amended returns are often made to correct an error in a previous return, a change in deductions, a switch in filing status, and/or an adjustment of tax credit.
Primary Reasons for an Amended Return
1. Correcting an error on a previous tax return
If you realize that your previously reported income is inaccurate, an amended return must be filed to correct the error. The error correction can lead to additional taxes owed or a refund on taxes paid.
If you’ve underreported income, the IRS can identify the discrepancy by cross-checking information from third parties. If it happens, you will receive a CP2000 notice from the IRS which must be resolved (more information on CP2000 notice below).
2. Changing your deductions
If you previously included or left out a dependent, you should file an amended return correcting the errors. Also, if you incorrectly claimed expenses, you should correct the error through an amended return. Depending on the correction, it could result in a material impact on taxable income.
3. Changing your filing status
Filing status determines what tax return form an individual will fill out. Filing status is related to the family situation and marital status. Ultimately, it could affect the taxable income. The five filing statuses are:
Married filing jointly
Married filing separately
Head of household
Qualifying widow or widower with dependent child
4. Adjusting tax credits
Tax credits reduce income tax payable, whereas deductions impact taxable income. Often, credits are related to dependents claimed on your return. If your entitlement to tax credits differs from the return filed, an amended return should be filed. An amended return can assist taxpayers in recovering their maximum tax refund.
Below are the three basic types of tax credits:
Partially refundable tax credits can decrease taxable income and income tax payable. If the tax liability is reduced to zero before the credit is completely used, the holder can take a refund of 40% of this credit.
Refundable tax credits are paid out completely to holders, whether it is a reduction in liability or a tax refund. The tax credits are very popular because the entire tax credit is completely recovered. Popular refundable tax credits are the Earned Income Tax Credit, the Child and Dependent Care Credit, and the Saver’s Credit.
Non-refundable tax credits provide relief up to the tax liability owing. The tax liability can be reduced to zero through a non-refundable tax credit but cannot provide any further benefit. Popular non-refundable tax credits are the Adoption Tax Credit, Foreign Tax Credit, and Mortgage Interest Tax Credit.
When Not to File an Amended Return
If you receive a CP2000 notice
If you miscalculate on your return
If you want to lessen penalties levied against you
A CP2000 notice is a notice received when the Internal Revenue Service (IRS) suspects that you have underreported your income. Alongside the CP2000 notice, significant penalties can be associated with underreporting. When one receives a CP2000, the individual should file a new return rather than an amended return.
Any arithmetic error will be corrected by the IRS; therefore, one should not file an amended return. The IRS will notify you by stating the correction with documentation.
Filing an amended return to reduce penalties is unnecessary. Instead, one can request for abatement due to reasonable cause or if it is your first time being penalized.
Limitations of an Amended Return
Anyone can file an amended return to more correct their tax return. However, complications arise when a company fraudulently evades tax then tries to amend it later.
Also, there is some controversy around the statute of limitations and whether the filing of an amended return constitutes a triggering of them.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!