When is Amending Your Client’s Tax Return Considered a Tax Planning Strategy?

It's the end of tax season, so your mind is likely shifting from “tax prep” mode into “tax planning” mode (or, at least, it should be). That means it’s time to boot up Corvee’s tax planning software and start looking for opportunities for your clients. Amending returns can be a great tax planning strategy to employ during these slow summer months, and recent tax legislation has produced a lot of new tax planning opportunities that require you to amend client returns.

Reasons Why Your Clients Need to Amend a Return

Now that the filing deadline has passed, there are a few situations that could prompt you to look back on a client’s prior-year tax return and make some changes.

To correct an error.

Correcting mistakes with an amended return can help your clients minimize interest and penalties. For example, forgetting to report a dividend or interest payment or filing under the wrong status could mean that your client underpaid their tax liability. Waiting for the IRS to catch the mistake could take months, and your client will be on the hook for paying the penalties and interest that accrue during that time.

To report new information.

If new information, such as a revised 1099 or K-1, comes to light after you’ve already filed your client’s tax return, it’s recommended that you amend the return to include this new information, as it could affect your client’s tax liability.

To adopt a new tax law that was passed retroactively.

When Congress passes new legislation, they often include tax-relief measures that apply retroactively and affect returns that have already been filed. In this case, you will need to file amended returns to take advantage of those tax-relief measures.

IRS Guidelines for Amending Returns

The IRS allows taxpayers to amend tax returns within three years after the original return was filed or within two years after they’ve paid any tax due on that return, whichever is later. Returns filed before the original due date are treated as if they were filed on the original due date (not including extensions).

Depending on your client’s entity type, the IRS requires you to file specific forms and follow certain procedures to amend their return. If you’re amending an individual income tax return, you can file Form 1040-X (along with supporting schedules) to make corrections. If your client is a pass-through entity, you will need to recreate their tax form (Form 1120-S or Form 1065) and mark the appropriate box that indicates an amended return. Most changes to pass-through entities will also require you to file amended Schedules K-1, which may also prompt you to amend the individual owners’ returns, as well.

Remember, once you amend a federal return, you may also need to amend a client’s state returns. When amending a state return for corrections made to the federal return, it’s a good idea to review the entire state tax return in a new light in case the Federal change qualifies your client for new deductions or credits.

Note that, starting in 2020, you now have the ability to file an electronic Form 1040-X to amend a 2019 tax return. Prior years still require a paper amended return to be filed – for now.

And finally, keep in mind that filing an amended return isn’t always necessary. If you notice math errors or forgot to attach W-2s or certain schedules, the IRS will generally correct those mistakes automatically and notify you by mail if any additional documents are needed to complete the return.

New Legislation Sparks the Need to Amend Returns Now

You may want to amend your clients’ returns sooner than later. In recent years, Congress has passed sweeping new tax laws that provided relief to American individuals and businesses, and many of these tax laws applied retroactively. To take advantage of these relief measures, you may need to amend your clients’ returns.

Below are a few recent tax law changes that may require an amended return.

Unemployment Income

The American Rescue Plan (ARP) enacted on March 11, 2021 deemed unemployment compensation nontaxable in 2020. Taxpayers with annual gross income less than $150,000 can exclude up to $10,200 of unemployment compensation from gross income.

The IRS will automatically recalculate returns for unemployment compensation and initiate refunds, but you may benefit from amending the return yourself. It’s possible that this reduction in income opens the door to new credit opportunities, and the IRS won’t apply those new credits without your client’s consent. Your tax planning software is especially useful to catch these tax saving opportunities. Inputting that small provision in our Corvee tax planning software could generate even bigger savings.

Please note that the ARP unemployment tax break applies to federal returns, but you may still need to file an amended state return to report the change in federal AGI. You’ll also need to do your research to see if your client’s states have adopted this tax break or if they have chosen to keep their unemployment income tax rules in place.

Net Operating Losses

With the number of businesses that experienced financial losses during the pandemic, it’s a good time to freshen up on the CARES Act’s net operating loss (NOL) rules. Prior to 2018, NOLs could be carried back two years or carried forward 20 years, and they could offset up to 100% of taxable income. The Tax Cuts and Jobs Act (TCJA) limited the carryforward to offset only 80% of taxable income and disallowed carrybacks altogether beginning in 2018.

Fortunately, the CARES Act temporarily and retroactively reinstated NOL carrybacks. NOLs generated after 2017 and before 2021 can be carried back for five years, or they could be carried forward to offset up to 100% of future taxable income.

Excess Business Losses

With the passage of the TCJA, beginning in 2018, taxpayers were only allowed to offset non-business income with up to $250,000 ($500,00 married filing jointly) of excess business losses. The CARES Act temporarily suspended the TCJA’s cap on excess business losses. This means that your clients may be eligible for a refund in tax years 2018, 2019, or 2020 if their excess business losses were limited. By filing an amended return, you could end up saving your clients a significant amount in taxes.

Planning Opportunities

With tax change comes opportunity. The tax system has experienced its fair share of changes over this past year (with more on the horizon), so plugging your client’s data into Corvee’s tax planning software could help you develop a valuable, multi-year tax plan. Corvee’s tax planning software not only helps you identify new tax saving strategies, it produces an easy-to-read deliverable you can use to show your clients exactly how much they would save if they adopted those strategies. This can help you sell your tax planning services and can help you be a better resource for your clients. Making that transition from tax preparer to tax planner will offer both you and your clients more opportunities to thrive.