How to Get Back Tax Dollars You Paid Years Before

The following is an excerpt from Julian Block's Tax Tips for Marriage and Divorce: Savvy Ways for Couples to Trim Their Taxes.

Everyone makes mistakes. That’s why pencils have erasers. And that’s why there’s no need to  panic if you recheck a Form 1040 after it was filed and discover an error—say, an overlooked deduction, exemption or credit, overstated or omitted income, an incorrect filing status, or some other miscue that could affect tax liability. Opportunities for errors abound because Congress continually changes our already complex Internal Revenue Code. And making amends can bring rewards.

The normally unforgiving Internal Revenue Service wants to help taxpayers who file their 1040 forms and subsequently spot errors. Those who decide that their returns were actually just first drafts can confess their errors by filing amended returns. More people than ever are expected to apply newly discovered tax information to 1040s filed in previous years.

The IRS receives millions of amended returns every year. It expects to process about 5 million corrected 1040s for 2010, says Diane M. Besunder, a spokesman in the New York office of the IRS.

Most mistakes involve overlooked write-offs or income items. But sometimes, returns that are accurate when submitted still need to be redone because Congress or the IRS retroactively revises the rules. Much more on that later.

The Paperwork

The IRS provides a relatively easy way to fix flubs or take advantage of retroactive changes, without the need to completely redo the return or go through any complicated red tape. Just contact the feds for Form 1040X, a simple (in most cases) two-page form known officially as Amended U.S. Individual Income Tax Return. Form 1040X comes with 11 pages of instructions on how to explain the reasons for the changes and how to compute  refunds or balances due.

Enter the refund amount sought on line 21 of the 1040X.  But you needn’t list an exact amount. To leave the door open for a refund in excess of the amount specified, tax pros routinely add this language: "Or such greater amount as is legally refundable, with interest."

Make sure to calculate the tax using the rates for the year of the return that you’re amending. And the tax brackets change every year because of indexing, that is, annual adjustments to reflect inflation.

Use the latest version of Form 1040X (completely redesigned in January of 2010), available at irs.gov. While you’re at the IRS site, download any forms or schedules for the year you’re amending. Also get Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, which has helpful information not contained in the instructions accompanying Form 1040X. Click on “Forms and Publications;” then click on “Previous Years.”

Amend with Care

Return corrections that change AGI, short for adjusted gross income, may affect a slew of deductions, credits and other breaks authorized by the tax code. Among other things, AGI governs the extent to which Social Security benefits are taxed. Revised computations also may prove necessary for deductions or credits that are tied to AGI or limited by a percentage of AGI, caution the 1040X instructions. These include: Schedule E deductions for losses on rental properties; “above-the-line” write-offs on the front of Form 1040 for higher education expenses, funds put in traditional IRAs, and interest payments on student loans; credits for first-time home buyers or longtime owners who bought another principal residence, adoption expenses, children under 17, child and dependent care, and education; and Schedule A itemized deductions for medical expenses, uninsured casualty or theft losses and  miscellaneous expenses.

Filing Tips for Amended Returns

Be mindful that no matter how meritorious your claim or how sympathetic the IRS may be, the agency will approve a refund only if you satisfy certain procedural requirements and file a claim in a timely manner. More in a moment on time limits. First, though, some IRS admonitions on how to avoid delaying correspondence and to speed up the processing of your refund claim.

• Submit a separate 1040X for each year for which you apply for a refund. The IRS is adamant on that; it makes no difference that your error is identical for more than one year. Filing a claim for, say, 2008 doesn’t put the IRS on notice that you also seek a refund for another year.
• Along with your 1040X, submit any applicable correspondence from the IRS or relevant tax-return schedules and forms—for example, corrected versions of Schedule A (changes in amounts claimed as itemized deductions) or Schedule D (changes in amounts reported as capital gains from sales of homes, shares of stock or other assets). Attach copies of any IRS notices that relate to your refund claim or previously filed return. The instructions specify, “Form 1040X must have the appropriate forms and schedules attached or it will be returned for them.”
• Remember to sign the 1040X. Joint filers both must sign.
• The 1040X is one of the few forms that can’t be filed electronically. You’ll have to send a paper copy to the IRS. Mail each 1040X in a separate envelope to the IRS Service Center responsible for where you live now, even if the return was originally filed with a different Service Center. But if you’re filing a 1040X in response to a notice received from the IRS, mail it to the address shown on the notice.

EXAMPLE: While preparing this year’s return, you discover that 2008’s return failed to claim all of your allowable deductions on: Schedule C for business travel; Form 3903 for moving expenses; and itemized deductions on Schedule A for job-search expenses, charitable travel, medical travel and investment travel. Or maybe you now realize you should have itemized deductions instead of taking the standard deduction or you forgot to take advantage of the child-care credit, which gives you a tax break on money paid to a caregiver for your children. Along with the 1040X, submit corrected 2008 versions of: Form 3903; Form 2441 for child and dependent care expenses; and Schedules A, C and SE (Self-Employment Tax). Why is it important for you to revise Schedule SE? Claiming additional expenses doesn’t just reduce the amount you show as profit on Schedule C, thereby reducing the amount of your income subject to income taxes. It also reduces the amount of your income subject to self-employment taxes, as calculated on Schedule SE. Many individuals get nicked more for self-employment taxes than for income taxes.

Note: The book goes on to list the following as "good reasons to amend your tax return" as follows: the wrong basis (on sold investments), medical deductions for home improvements, standard deduction versus itemizing (take one then find the other was better), change of filing status, and retroactive law changes and tax elections. See the book for details.