What is an Amended Return?
An amended return is used to make corrections on the previous year’s tax return to provide more representationally faithful information. An amended return can increase tax benefits or tax liability, depending on the amendment.
To file an amended return, 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 within three years after the original return due date, or within two years of the reduction of tax liability.
- A taxpayer can file an amended return through filling out a Form 1040X.
- The statute of limitations on an amended return is the later date three years after the original return due date or within 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 adjustment of tax credits.
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 a larger tax return or tax amounts owed. If you will owe more money after filing an amended return and choose not to file, you can receive a CP2000 notice.
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 affects 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 maximizing their tax refund to the legal constraint.
Below are the three basic types of tax credits:
- Partially refundable
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. These tax credits are very popular because the entire tax credit is completely used. 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 reach out afterward, 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 faithfully represent their financials. However, complications arise when a company fraudulently evades tax then tries to amend it later. Also, there is controversy around the statute of limitations and whether the filing of an amended return constitutes a triggering of them.
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