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Amended Tax Return CPA offers Tips on Form 1040-X, Amended U.S. Individual Income Tax Return

Form 1040-X CPA discusses amended tax returns

Gary Bode, CPA: many reasons exist for amending a prior tax return. (910) 399-2705.

Amended Tax CPAs prepare more than just Form 1040-X. 

Amended tax returns update the original return’s information. CPAs agree that many IRS tax refunds go unclaimed because beneficial information became available after filing the original tax return. Amended tax return CPAs always have amazing stories about Folks losing these potential refunds because of the IRS three-year limit on refunds. I’ll tell a few of mine later to demonstrate Form 1040-X, Amended U.S. Individual Income Tax Return, tips. Tips are in green below.

Amended tax return CPAs amend other types of tax returns too. Almost every type of federal tax return can be amended:

  • S Corporation Form 1120-S.
  • C Corporation Form 1120.
  • Partnerships Form 1065.
  • Payroll Form 941 etc.

But in this post I’ll just recap some amended personal returns we did in 2013 using Form 1040-X and give some general tips on how to prepare it.

Refund generated – Form 1040-X, Amended U.S. Individual Income Tax Return Example – Rental Property Short Sale and Cancelled Debt: Form 1099-S, Proceeds From Real Estate Transactions, and Form 1099-C, Cancellation of Debt 

A new client received an IRS Notice CP2000 proposing addition tax of $110,000. Why?

  • He had a rental property short sale two years ago and didn’t report it to the IRS. Naughty naughty.
  • The IRS demanded $110,000 based only on the sales price of the property, as reported to them on tax Form 1099-S, Proceeds From Real Estate Transactions, issued by the rental real estate broker.
    • Form 1099-S reports the transfer of real estate to  the IRS and tax payer.
    • Form 1099-S requires an IRS calculation for the gain or loss on the “sale,” in this case a rental property short sale.
    • This same example works for Form 1099-A, Acquisition or Abandonment of Secured Property, and Form 1099-C, Cancellation of Debt.
      • Both these forms can trigger the same “sale” as the Form 1099-S.
  • So the original Form 1040 had to be amended. Why?
    • First the IRS wanted $110,00 and we had to prove this was an error.
    • Thanks to the Recession, LOL, his basis in the rental property was higher than the sales price.
    • So instead of the gain, and the $110,000 taxes due, he generated an ordinary loss on the short sale that offset his other income. An example of making lemonade out of lemons.
  • I proactively pulled his IRS Wage and Income Statement.
    • Sure enough two lenders reported the mortgage debt cancellation from the short sale to the IRS on 1099-C, Cancellation of Debt.
      • Cancelled debt becomes taxable income unless you can exclude it on Form 982.
      • In this case we used to exclusions on Form 982, Reduction of Tax Attributes, to exclude the rental property cancelled debt.

If Form 1040-X, Amended U.S. Individual Income Tax Return, only reflected the rental property sale, the original contention on the IRS Notice CP2000, another inevitable future notice would have required us to amend the first 1040-X. Final result? A single amended return, Form 1040-X, solved both issues and generated a refund.

TIP: make sure an amended tax return, Form 1040-X or otherwise, presents complete information. It’s best to pull the IRS transcripts.

Client didn’t report Cancelled Debt or Rental Property Expenses or Moving Expenses  — Refund!

Here a client had a car re-possessed a few years  back and the bank cancelled the remaining debt. Again, the IRS considers cancelled debt as income. So they dinged him with a Notice CP2000 for income tax on the “forgiven” loan amount.. I noticed he had moved during that tax year. Sure enough the move was job related. So, moving expenses were deduction number one. I always pull tax returns for years after the amended return to check for any other  issues lurking in the IRS systems. He collected rent on his old house the year after he moved. Because of the Recession he couldn’t sell the house. He assumed that if there was no rental income, there could ‘t be rental property expense. That’s not true. There’s deduction number two. So the Form 1040-X solved his original problem with the IRS and found enough other deductions to create a legitimate refund.

TIP: often when amending with 1040-X you can provide legitimate tax deductions and credits to offset the IRS tax demand.

New Client on a $2,000 a month IRS Installment Agreement file Form 1040-X and has $250,000 Loss to carry back and forward to other tax years

Here a new Client with concerns about whether the IRS was correct on their Notice CP2000 for 2008. He agreed to an IRS Installment Agreement, without any CPA advice for about $2,000 a month. No refund is possible for 2008 because 2014 is more than three years from the original filing date. An un-reported rental real estate transaction caused the IRS to ask for taxes on the entire sales price of rental property. In this case I decided to amend 2008 with Form 1040-X, Amended U.S. Individual Income Tax Return. Well, he generated $250,000+ of ordinary loss he couldn’t use in 2008. Because of the circumstances the IRS required he carry that back to 2006 and 2007. No refunds there. But the rest of the loss got carried forward and  generated a $13,000 refund for 2011. In this case we used Form 1045 instead of Form 1040-X for 2011 because that saved him some tax preparation fees.

TIP: never blindly accept the IRS demand. They’re usually correct for information they know about. But here we gave them the true transaction details.

General Comments on submitting Form 1040-X and other Amended Tax Returns

Form 1040-X,Amended U.S. Individual Income Tax Return, requires preparing a new, correct Form 1040. Form 1040-X shows how this new tax return differs from the original and explains why. I believe all amended tax returns are hand processed. So amended tax return CPAs present an air tight case with clear and concise explanations, backed by well presented documentation. I think of it like a high school project to a notoriously fussy teacher. Personally, I try to look at Form 1040-X from the IRS Agent’s perspective, which I think is probably cynical. I anticipate red flag issues and proactively address them on Form 1040-X with explanations and documentation.

But here’s the most important tip an amended tax return CPA can offer:

TIP: don’t open other tax issues with Form 1040-X.

Do you need a Form 1040-X CPA to Amend your Tax Return?

Maybe not, I’m sure many folks self prepare Form 1040-X. Sometimes the issues are straight forward. If you run into problems consider calling us for a free consult.

Amended tax returns sometimes show refunds!

I’m and amended tax return CPA with virtual office. So I can help you with Form 1040-X wherever you live. For a free phone consult please call (910) 399-2705.

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