By Larry Lawler, CPA, EA, CTRS, NTPI Fellow
10 Answers to Common Amended Return Questions
(That many practitioners don't know)
It’s highly likely that you know some of the information I put together for you in this article. Please let me know if the material is helpful to you. I’ll write additional articles on tax problem resolution topics if it is. If not beneficial or I don’t hear from anyone, I will devote my time to other matters. You are in control. If you have topics that I can address, let me know. Hope this helps and here we go…
In this article we will cover:
- Does an amended return extend the Statute of Limitations?
- Can you avoid the 20% accuracy-related penalty by filing an amended return?
- Should you file an amended return when your taxpayer has received a CP2000?
- Do you file an amended return when AUR (Automated Under Reporter) Unit notifies your taxpayer of income missing on their tax return?
- Can your divorced taxpayer file an amended return without their former spouse?
- What place do amended returns have when a taxpayer has incomplete records?
- When you discover an omission on a return, are you obligated to amend the return? Does your responsibility change depending on having prepared the return or not.
- Should an amendment be prepared when IRS does an SFR (Substitute for Return)?
- Does “quiet disclosure” by amended return qualify as voluntary disclosure for programs with specific voluntary disclosure methods or programs?
- Practitioners can be penalized $5,000 for filing a frivolous return. But does this apply to amended returns?
- Bonus – a quick run down of many of the items that are considered frivolous.
1. Does an amended return extend the Statute of Limitations?
An amended return generally does not extend the Statute of limitations. One exception (surprise that there’s an exception) is when the IRS receives an amended return within 60 days of the assessment statute expiration date (ASED).
In that case, the ASED is extended to allow the IRS 60 days from the received date in which they may assess additional tax. IRC§6501(c)(7) and IRM 22.214.171.124.4.2
2. Can you avoid the 20% accuracy-related penalty by filing an amended return?
Yes, but (I know there’s always a “but” after the IRS says “yes, you can do something”) the amended return will qualify to avoid the 20% accuracy-related penalty (IRC§6662). However, the penalty is only avoided if the amendment is filed before the first contact advising the taxpayer of a prospective examination of the return being amended. Reg. 1.6664-2(c)(3)
3. Should you file an amended return when your taxpayer has received a CP2000?
No amended return should be filed when a CP2000 is issued. The CP2000 instructions advise how to respond.
As expected, there is an exception. As I said above, you would not file an amended return; except when other changes are needed. If so, prepare the 1040-X, write “CP2000” at the top, and send it back with your CP2000 response.
Pointer: Check other years not addressed currently by IRS and file amended returns if there may be adjustments to those years. You may be able to save your client from the IRC§6662 penalty.
4. Do you file an amended return when AUR (Automated Under Reporter) Unit notifies your taxpayer of income missing on their tax return?
When the IRS can’t find income that they believe should appear on a tax return, they will turn it over to AUR to investigate. AUR will send the taxpayer Letter 2531 and Form 15114, which is the proper way to respond. You should not file an amended return.
If the IRS is correct that the income was omitted, check the appropriate box on the 15114 to agree with IRS, sign and return to AUR.
If the return was correct as filed, check the box on the 15114 disagreeing with IRS and send supporting documents.
On occasion, IRS will send Letter 2030 proposing changes to the income reported on a return. One column will show the “Income per return” and a second column will be titled “As corrected by IRS.” Review the letter to determine if IRS is correct and respond using Form 15113 that they will have enclosed. Do not file an amended return. Proceed as in items 4b and 4c above.
5. Can your divorced taxpayer file an amended return without their former spouse?
a. Yes, a divorced taxpayer may file an amended return (Form 1040-X) to amend a jointly filed return. IRS will issue a refund even without the other spouse’s signature. IRS will recompute the tax liability of the spouse filing the amended return and refund based on their allocation between the taxpayers.
6. What place do amended returns have when a taxpayer has incomplete records?
Sometimes taxpayers believe they cannot file a return because they lack adequate data. Not true. IRS advises taxpayers to file timely using whatever documents they have and the best estimates they can make for missing information. Filing saves failure to file (FTF) penalties.
Disclosure should be made when filing such a return. Wording such as: “This return is based on limited data and missing documents. Should additional data or documents become available, an amended return will be filed to report appropriate changes.”
7. When you discover an omission on a return, are you obligated to amend the return? Does your responsibility change depending on having prepared the return or not?
Circular 230, which governs the rules of practice before the IRS, states that a practitioner is to promptly advise the taxpayer of such discovered error and the consequences of correcting it or not. It is irrelevant whether the practitioner did or did not prepare the return.
The practitioner is under no obligation to advise the IRS of such discovery. Relating the steps to correct the error is best practice, but disclosure to the IRS may only be at the taxpayer’s request.
The decision to advise the IRS of the error is solely at the taxpayer’s discretion. Even if a taxpayer is under audit and the practitioner is aware of a mistake on the return being examined, the practitioner should not disclose the error without the taxpayer’s consent.
However, if the examiner discovers the error independently, that is a different circumstance. The practitioner who is engaged to represent the taxpayer in the audit may discuss issues raised by the examiner.
Practitioners should discuss the disclosure of known errors with their taxpayers before the audit; up-front concessions may demonstrate the taxpayer’s honesty to the examiner.
8. Should an amendment be prepared when IRS does a Substitute for Return (SFR)?
IRS sends non-filers a 30-day letter proposing a tax amount due based on the third-party filed 1099 and W-2 forms. Upon receipt of the 30-day letter, do not sign the 30-day letter and do not file an amended return.
The best practice is to file the taxpayer’s original return. This will often be favorable as to the tax amount and will start the clock on the Statute of Limitations on Assessment, unlike the SFR.
What if the taxpayer comes to you after (sometimes long after) an SFR has been filed? Then you should file the original return to replace the SFR.
Pointer – don’t be confused if the IRS posts that original return on the transcripts as an amended return. They will do this because their system already has a return posted (the SFR), and there cannot be two returns for the same period. Therefore, they post the original as an amendment to the SFR already on file. It’s understandable, and the record then reflects the correct (original return) data.
9. Does “quiet disclosure” by amended return qualify as voluntary disclosure for programs with specific voluntary disclosure methods or programs?
Attempting to fly below the radar is fraught with danger. If IRS has a voluntary disclosure program, like the offshore voluntary disclosure initiative, but the taxpayer attempts to be essentially anonymous by filing an amended return without following the IRS defined procedures, they may end up under audit and exposed to criminal prosecution.
10. Practitioners can be penalized $5,000 for filing a frivolous return. But does this apply to amended returns?
The IRS is not forgiving on any frivolous return, original or amended; it doesn’t matter. Further, an amended return can actually be considered the same as an original return by the IRS even when the taxpayer filed no original return.
The amounts per return for the original are then zero. See Reg.301.6211-1(a) and Koch v. Alexander
Bonus – a partial rundown of many of the items from IRS Notice 2010-33 that are considered frivolous and may give rise to the $5,000 penalty. See IRC §§6702(a) and (b)
Frivolous arguments include contentions such as:
- Filing returns or paying taxes is voluntary under the law. Rev Rul. 2007-20
- The IRC fails to require filing a return or paying a tax unless the IRS responds to a person’s questions, correspondence, or a request to identify the IRC provision requiring filing or paying.
- No legal requirement to file exists due to the lack of OMB control numbers on IRS Form 1040, 1040A, or 1040EZ instructions. The OMB numbers are mandated in the Paperwork Reduction Act of 1980.
- The taxpayer may file a zero income and zero tax liability return even when the taxpayer received income in the period covered by the return.
- Taxpayers may refuse to pay income taxes on religious or moral grounds by invoking the First Amendment or because taxes are used to fund programs opposed by the taxpayer.
- Forced compliance with tax laws is a form of servitude prohibited by the Thirteenth Amendment.
- The Sixteenth Amendment was never properly ratified. Therefore, income taxes are unconstitutional.
- IRS was not created by Congress and is not an agency of the United States. Ergo, the IRS lacks the authority to enforce the IRC. See IRC §7801 granting Sec. of Treas. Proper authority.
- A taxpayer may untax, detax, or otherwise remove themselves from the tax system.
- The prohibition against self-incrimination in the Fifth Amendment permits a taxpayer to withhold financial information from the IRS.
- The requirement to file a tax return is unreasonable search and seizure prohibited by the Fourth Amendment.
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Larry Lawler, CPA, EA, CTRS, NTPI Fellow
Larry is the National Director of the American Society of Tax Problem Solvers (ASTPS). He has represented literally thousands of taxpayers before the Internal Revenue Service and is a frequent public speaker, a writer on professional topics, and a regular trainer of tax professionals nationwide. He has been a New York Certified Public Accountant since 1973. He is also a fellow of the National Tax Practice Institute. Larry is the managing partner of Lawler & Witkowski, CPAs, PC, the firm he established in 1973.