Filing your income tax return may not be the end of the tax story for the year. You may revisit taxes for the year by means of an amended return. Due to various law changes resulting from the pandemic, there are several refund opportunities you may qualify for and obtain a tax refund if you file an amended return; the IRS doesn’t send such refunds automatically. These refund opportunities are in addition to the usual ones. Here are some issues to consider in filing an amended return.
Correcting Tax Mistakes
Generally, you must file a refund claim within three years of the due date of the return or, if the return is filed after the original due date, then the actual filing date. However, other periods apply to special situations, such as refunds where no return was filed or for refunds related to bad debts or worthless securities. If you miss the deadline, you can’t obtain a refund under any circumstances even though you would have if you’d filed on time.
File the Right Form
Each type of taxpayer—individual, partnership, corporation—has its own type of form to make a refund claim.
- Individuals (including sole proprietors and owners of pass-through entities) file Form 1040-X. An amended return for 2019 can be filed electronically. Amended returns for earlier years must be filed on paper.
- S corporations file Form 1120-S, the usual tax return, and check the box to indicate that it’s an amended return. Amended Schedule K-1s must be issued to shareholders.
- C corporations file Form 1120-X.
- Partnerships usually file Form 1065-X. However, small partnerships that have elected out of the centralized audit procedures file the usual Form 1065, check the box to indicate it’s an amended return, and issue amended Schedule K-1s to partners. Note that for certain refund opportunities created by the CARES Act in response to the pandemic, partnerships that would otherwise file Form 1065-X to amend 2018 and 2019 returns had been permitted to Form 1065 by September 30, 2020.
You may be eligible to file for a “quick refund” even before filing a return in certain situations. For example, if you expect 2020 to be a bad year, you may be able to file a refund claim against all of the prior five years on one form before you submit your 2020 return and obtain cash that you can use for your business. If you report on a calendar year, you could submit the quick refund claim on January 1, 2021 (a quick refund must be filed within one year after the end of the year in which the net operating loss arises). This is a tentative refund process where you receive the money promptly, but the IRS has the right to review the claim in greater detail and may disallow or alter the refund amount.
Look for Refund Opportunities
There are a variety of reasons to file an amended return to get money back. These include (but are not limited to):
- Net operating loss carryback. The CARES Act introduced a 5-year carryback for net operating losses arising in 2018, 2019, and 2020. This allows the loss to offset income in the carryback years and generate a tax refund. Any remaining losses can be carried forward and used in future years.
- Qualified improvement property. If you made changes to the interior of your commercial building in 2018 or 2019, a law change may allow you to file for a refund.
- Disaster losses. If you suffered damage or destruction to your property as a result of a federally-declared disaster and the loss is not covered by insurance, you can opt to deduct the loss on the return for the prior year. For example, if you suffered a loss due to the wildfires September in the West Coast or Hurricanes Laura and Sally, you don’t have to wait to file your 2020 return to take the loss; you can claim it on a 2019 return. The IRS lists disaster designations by year. But watch the special deadlines if you want to change a prior election (e.g., you claim the 2020 loss on a 2019 return but then want to change to 2020).
- General business credits. If you can’t use all of the income tax credits for your business because of the general business credit limitation, there’s a one-year carryback. Unused amounts are then carried forward for up to 20 years (or used up in the final year of business).
You may also file for a refund if you simply overlooked a deduction or tax credit to which you were entitled.
Consider the Cost of Filing
If you do it yourself, filing an amended return merely involves your time and effort. If you rely on a CPA or other tax professional, there are fees involved. Be sure the amount of the refund expected is large enough to justify the fees.
A common question is whether there’s an increased risk of being audited if you file an amended return. Most experts say that filing an amended return likely doesn’t increase the risk of being audited, and given limited IRS resources at this time, audit rates are very low. But you never know.
Don’t waste an opportunity to recoup taxes you paid if you’re eligible for a refund. But determine whether or not to do so. Discuss the matter with your CPA or other tax advisor.