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Rewriting Tax History

Candace Varner

Ben Hake

In this episode of The Standard Deduction, Tax Directors, Candace Varner and Ben Hake discuss when and why an amended return may be a good idea.

The Standard Deduction podcast is hosted by Tax Directors, Candace Varner and Ben Hake. This podcast is a thoughtful, informed discussion about ideas, trends and developments in taxes related to personal wealth management.

Our mission is to educate and inspire people to make better financial choices through knowledge, tools and strategies that ensure a more prosperous future. We believe that education and planning are key components to financial success. Come explore relevant financial topics with our team.


Candace Varner: Hello, and welcome to The Standard deduction. I’m Candace Varner.

Ben Hake: And I’m Ben Hake. And for our loyal listeners, back in February, it was that height of tax season, but it was also our one year anniversary. So thanks for listening in on us for the last year.

Candace: February was the height of tax season?

Ben: It was pretty darn close.

Candace: Well, I think it’s the last 15 months solid, but okay. I’ll take it.

Ben: Excellent. Well, now that we’re getting close to the extended deadline, the next part of our normal year is finding out about the things we didn’t know about when we were wrapping up these returns and possibly having to amend some tax returns for our clients.

Candace: Everyone loves a surprise after the tax deadline. That’s always good to hear from your clients. To start off with, a common misconception about amending a return. It doesn’t mean that you’ve done anything wrong. I once talked to my mother about this. And she said, “If someone’s amending their return, isn’t that suspicious? Doesn’t that mean there’s some sort of fraud or something?” No, that is not at all what that means. It means usually you found out something later. So Ben, what are some reasons that you find from your clients that you end up having to amend return for?

Ben: I’ve had a bevy of reasons. I once had one where I asked the client if they had a kid, they said yes. We filed the return. And then it came up that they had two kids because it was twins and we needed to claim the second one.

Candace: Yes.

Ben: Easy for me to forget about, maybe less so for them. No, but more common reasons we find out about that would just be late received items. So it’s not uncommon for brokerage statements to issue corrected 1099s, and some of those can be really late. Another one is a K-1 or an amended K-1 is received after the deadline. Taxpayer thought they had the last version and it turned out that wasn’t the case. So a lot of the times it’s things maybe no one even knew about by the time we had filed the original return. We’re just needing to kind of get that process corrected.

Candace: Yes. This year, especially, I think we’ve got some amended returns maybe because there’s a late change in tax law. I think we talked about that last time. There were some changes in March for 2020 taxes, which is pretty unusual. And for some of those, the IRS is going to make those adjustments on their own. The unemployment, they’re going to, I believe, start issuing refunds for that. But in general, it’s another reason that you might have to amend your return. Now, when you go to think, okay, I got this corrected 1099. Let’s say it changes my dividends by $5,000, which is a change in tax of a $1,000. Do I have to amend the return? No. Filing a return is required. You have to file a return. You have to pay your taxes. But then after the fact you find out maybe something needs to be adjusted, like the 1099. You are not legally required to amend your return. There are reasons you might want to, i.e. the change is favorable to you and it would result in a refund. But for something else you might choose to just wait and see if and when the IRS sends you a letter about it. If it’s something like a 1099, they will eventually, eventually, correct your account, showing the income, and send you a bill for the additional amount due. So maybe you just want to ride that out. You don’t want to pay. You’re prepared to actually file an amended return. You just want to wait and see what the IRS says. That’s an acceptable option, too. Let’s say you decide you do want to amend the return. And it’s maybe going to result in a refund for you. It’s favorable. Just last year, they started allowing us to e-file the amended return, which is huge logistically, because previous to that, we always had to actually paper file, sign it, mail it, and as we all know that it’s much less predictable and a good way to go. The states are a little bit slow to catch on, so we can’t e-file state amended returns yet. And when you amend a federal return, that adjusted gross income flows down to your states as a starting point. So if you amend the fed, you’re going to have to amend your state returns, too. So just think that through and look at the entire implication of the change.

Ben: No, that’s a 100% correct. I know, why would it be wrong? The other thing is that a lot of the times the question is, I’ve got an amended return. How far can I go back? And the answer for that is going to be it’s three years from the due date, or if you extended your return, the extended deadline. So if you find out about, “Hey, I forgot I made this very large charitable contribution and it’s four years after the fact,” the IRS won’t allow us to go back and change that return. So that’s why it’s important that if you think you missed something to kind of maybe potentially get that done relatively early, that way you can get the refund and actually get your funds back. The other is that there are some things that we can file amended returns to pick up a lot of different information and to get that information to the IRS and states. But there are some things we can’t change. So if you file your return and you said, “Hey, I’m overpaid by $10,000. I want to credit that forward to the next year.” And then it turns out that for whatever reason, you don’t need to do that anymore. And it’d be better to have that refund. That’s an irrevocable decision. So there are some things that even though you’d like to change, the IRS won’t allow us. The same as for some certain elections that once made, we can’t change via an amended return.

Candace: Another common misconception about amended returns is that they’re going to be an audit trigger. It’s not something that is an automatic audit red flag. It just means, like we’ve kind of covered, there might be a small change. And so you don’t need to worry about making the correction as an issue that would flag your account for future audits or anything like that. Audits are chosen based on totally different criteria and not based on whether or not there is an amended return filed.

Ben: Perfect. And the other thing is that a lot of clients, amending your return’s not the only option. So generally speaking, April 15th happens. And that’s when you find out about a change. These last two years, for the 2019 to 2020 filing, the due date’s been a little later. So the IRS also offers the opportunity to submit what’s called a superseded return, which basically says, “Ignore the first one. We’re not amending it. You’re just going to totally disregard it and accept my newly filed return.” The kicker there is we can only do it by the due date of the return. So once we get past it, there’s not a whole lot of opportunity to change that. The other, and it’s, again, fairly unique to 2020, is we’ve had a lot of clients because of COVID who have had drastically different business results. And maybe that’s even resulting in an operating loss. So the IRS allows taxpayers to kind of carry that loss forward or backwards. And one thing to consider is if you’re taking it backwards, instead of having to go back and amend a bunch of returns, they do have a form, a 1045, that says, “Hey, this is this loss. And this is how it would have changed all these years.” And you don’t necessarily have to submit multiple years of amendments. You could do one return and then submit it to the IRS and get the refund that way. The only timing constraint there is, it has to be filed by the end of the year after your loss. So if we’ve got a 2020 loss, you can only file that form up until December 31st of 2021, at which point if that goes past, then we’d have to amend a bunch of back returns. So some of those options are a little bit faster and easier compared to doing a lot more legwork on the amended return.

Candace: Yeah, anytime we’re filing an amended return and want a refund, we want it as fast as possible, which is a difficult ask given that the IRS takes a really long time to process basically anything right now.

Ben: Indeed.

Candace: All right. Thank you very much, Ben.

Ben: Thanks, Candace.

Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.

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