Valid Reasons for Your Client to Want to Amend a Tax Return

When taxpayers receive a letter from the IRS about an issue regarding their taxes, they often panic and think that the best way to fix the problem is to refile. As their CPA, you are their tax expert and can calm them down. Correspondence from the IRS, such as a CP2000 notice, an audit notice, or a rejection of an e-filed original, is not solved by refiling – that will only confuse the system. Help your clients respond according to the instructions outlined in the letter from the IRS. 

A calculation error is also not a reason to refile. Obviously, if you did their taxes, there is not likely to be a calculation error in the work you did through your software, but if they made the error, they may be tempted to refile. Assure them that the IRS is likely to pick up calculation errors and inform them of any changes. Likewise, if a taxpayer forgot to include a required form or schedule, the IRS will let them know. 

When should your clients file an amended return?

There are legitimate reasons to amend a tax return. The IRS lists them broadly as:

  • Changes to filing status
  • Changes to the number of dependents
  • Correcting income
  • Claiming deductions or credits unclaimed
  • Removing credits or deductions improperly claimed 

Some valid reasons to amend are pretty straightforward. For instance, a client may become aware of a tax credit or deduction he or she could have gotten in the past, such as a childcare credit. A client may also receive a revised W-2 or 1099 from an employer or brokerage firm. 

A less common reason is the ability of a property owner in a presidentially-declared disaster area to take property losses in the year prior to the tax year when the disaster occurred. 

Net operating losses for a business can be carried back to the previous two tax years, besides being carried forward. This could provide your business client with a significant tax benefit. 

When a marriage is legally annulled, the formerly married couple may file an amended return, changing marital status to single, in the previous three years (if they were legally married on December 31 of the year being amended). Similarly, couples who have filed singly may be able to amend previous returns to file jointly.

 An amendment of a tax return may be appropriate due to miscalculated costs of investment or the discovery of a worthless security that now affords an opportunity to take a capital loss in a previous year. 

Keep in mind, too, that with ongoing changes in IRS rules or court rulings that clarify rules, it is critical to consider how any changes may affect your clients’ previous tax returns. 

Remember, if you amend a federal tax return, you may need to amend the state return, as well. 

Helping your clients make the right decision about filing an amendment

Your clients have up to three years to file a Form 1040-X, or within two years from the date the person paid the tax, whichever is later, in order to receive a tax refund from an amendment. There are some exceptions to this, which are explained in the 1040-X instructions, but this deadline covers most situations. 

As the tax expert for your clients, they trust you to help them find every tax advantage that is available to them. Thorough knowledge of your clients will help you uncover any possible deductions or credits that may have been missed in the past or that can be taken advantage of in the future. Walk them through when it’s worthwhile to amend and when it is not necessary. This personal, proactive attention will further strengthen their confidence in your services and open up opportunities to grow your practice.