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Tax Advice: To Amend or Not Amend a 1040

Aug 13th 2019
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How expensive or time-consuming can it be when a tax payer makes mistakes on their 1040?

I recently received a query from a California-based freelance writer, whom I will call Abigail, that had this problem and questions about amending the return.

I assure Abigail that the IRS provides an easy way to amend and set things right. Still, as explained below, I caution that she might need to huddle with an accountant on whether it’s advisable to amend.

As for the inevitable paperwork, the IRS requires her to submit Form 1040X (Amended U.S. Individual Income Tax Return), available at irs.gov, or she can call 800-829-3676 (800-TAX-FORM). Filling one out usually takes little time. How the IRS responds will be good news or bad news.

  • Bad news: The agency’s review of the 1040X results in a determination that she owes more in nondeductible taxes, interest and penalties.
  • Good news: The reviewer decides she’s entitled to a refund (it doesn’t count as reportable income), plus interest (it does count). 

To help Abigail better understand when submission of a 1040X helps or hurts, I created a trio of hypotheticals:

The first one: Abigail took the standard deduction that’s authorized for individuals who opt not to itemize. She later discovered that it would’ve been more advantageous to use Schedule A and itemize for expenditures like donations, outlays for medical care, interest payments on her home mortgage and state and local income and property taxes.

The second one: Abigail filed an accurate 1040 that was accompanied by Schedules C (Profit or Loss From Business) and SE (Social Security taxes for self-employed individuals). However, Schedule C didn’t include write-offs for outlays like purchases of furniture and equipment or expenses incurred to attend writers’ conferences or other meetings.

Abigail’s 1040X paperwork begins with filling out Schedule A and correction of Schedule C. Is her paperwork completed when she revises Schedule C to claim more deductions and decrease the amount shown for net profit? Absolutely not. To avoid overpaying her self-employment taxes, she also needs to redo Schedule SE.

How come? Because there’s a link between Schedules C and SE. A reduced net profit on Schedule C not only reduces the amount of her business income subject to income taxes, it also reduces the amount of Schedule SE income subject to self-employment taxes. That’s welcome news,

I remind Abigail, as many freelancers lose more to self-employment taxes than to income taxes. I would be remiss in my responsibilities to Abigail were I to fail to set up a third hypothetical, one that underscores why she might want to meet with an accountant on whether to submit a refund claim.

While the IRS agrees Abigail’s entitled to those overlooked deductions for furniture and conferences, a zealous reviewer expands the review of Schedule C and decides to disallow lots of other write-offs. Should that happen, I tell her to forget about receiving a refund. What she will receive is an IRS bill for additional taxes, plus nondeductible interest charges and penalties.

My final admonition to Abigail: Anticipate additional tax troubles as California is one of those states that imposes income taxes and routinely receives results of IRS examinations, such as its scrutiny of her 1040X. Soon after she’s billed by the IRS, she’ll be billed by California for additional taxes (maybe deductible on her 1040 form and not deductible on her state form) and interest charges and penalties (definitely nondeductible on both forms).

Something else that Abigail and her accountant could consider about her payment of the California taxes: Does she forfeit any deduction or does she salvage something on her 1040 for the year that she pays California? Whereas using the standard deduction means no deduction at all for the payment, itemizing on Schedule A might help.

Astute accountants (meaning those who read and remember my columns for accountingweb.com) will direct Abigail’s attention to the Tax Cuts and Jobs Act. The legislation includes a cap on Schedule A deductions for payments of state and local income taxes and property taxes. The ceiling is $10,000 for married couples filing joint returns and single persons (dropping to $5,000 for couples filing separate returns).

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

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