Statute of Limitations for Amended Tax Due Return

[gfizer]

Per IRS instructions for Form 1040-X:

"File Form 1040X only after you have filed your original return. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later."

I have a new client who is a minister. While reviewing the previous year's return I noticed that he had paid no SE tax which prompted me to ask whether he had a Form 4361 exemption. He said no. Turns out the previous preparer (who calls herself a clergy expert, btw) prepared the return as though he was exempt even though she admits the file was clearly marked that he did not file Form 4361. Further review of previous years' returns revealed that the same was true for 2007, 2009, and 2010 as well as 2011. She has prepared amended returns for the client's review and he has asked me to look them over.

My questions is should he not file amended returns for 2007 and 2009 since they are closed returns or does the 3 year SOL only apply to refund returns?

(Just for kicks, please note that the other preparer told him there was no reason to file ANY amended returns because the payment of SE tax was voluntary and it really only meant he wouldn't receive credit for the earnings for those years on his social security record.)

Thanks for your help!

Gina

[Jack from Ohio]

No statute of limitation if you owe.

[JohnH]

I disagree. The SOL applies for all closed years unless certain dollar limits for under payment or under reporting are exceeded. That's why we have a SOL in the first place.

[TaxMan60601]

Can't cite a quote from the Code, but generally agree with both of you - at least this is what my experience shows. Year ago I had a client who was "advised" to file amended returns for 2001 and 2006 - they report a huge owed amount on record for 2006 ...

And another one who was "advised" to file all his tax returns since 2003, having in mind the fact that I KNOW that he is a regular and correct filer since 2006 - seems like it was not the case before 2006

Anyway, I see that IRS are chasing the obligation and force any actions up to ten years after the event. After that they 'officially' close the case. Actually they 'pass' the debt to private collectors ...

Anyone with more experience on this or anyone who can post a link with more info on the above will be highly appreciated. Thanks.

[Guest Taxed]

This is from the IRS manual of circumstances that may extend the statute of limitation for returns with a balance due. Note the last section "other circumstances". I think that is a catch all??

• IRC Section 6501(c )(1), False Return

• IRC Section 6501(c )(2), Willful Attempt to Evade Tax

• IRC Section 6501(c )(3), No Return

• IRC Section 6501(c )(4), Extension by Agreement

• IRC Section 6501(c )(5), Tax Resulting From Changes in Certain Income or Estate Tax Credits

• IRC Section 6501©(6), Termination of Private Foundation Status

• IRC Section 6501(c )(7), Certain Amended Returns

• IRC Section 6501(c )(8), Failure to Notify the Secretary of Certain Unreported Foreign Transfers

• IRC Section 6013(b ), Joint Return After Filing Separate Returns

• IRC Section 6501(h), Net Operating Loss (NOL) or Capital Loss Carryback

• IRC Section 6501(j), Credit Carryback (as defined in IRC Section 6511(d)(4)©

• IRC Section 6501(i), Foreign Tax Carryback

• IRC Section 6503(a), Statutory Notice of Deficiency

• IRC Section 6503(c ), Taxpayer Outside United States

• IRC Section 6501 (e), 25% Omission

• IRC Section 6501(f), 543(a) & 544, Personal Holding Company

• IRC Section 6501(b )(3), Substitute for Return - SFR

• IRC Section 6901, Transferees, & Transferors Transferred Assets

• IRC Section 6229, Partnership Items

• IRC Section 6503(h), Bankruptcy

• IRC Section 6501(c )(4), Agreements that Extend the Time to Assess

• Returns with Extension of Time to File

• IRC Section 1033(a), Involuntary Conversion

• IRC Section 6501(c )(9), Gift Tax (Form 709)

• IRC Section 1314 (b ), Mitigation

• IRC Section 664, Charitable Remainder Trusts

• IRC Section 6501 (e)(3), Excise Tax Substantial Omission

• IRC Section 6501(c )(8), Failure to Notify the Secretary of Certain Unreported Foreign Transfers

• IRC Section 6501(c )(10), Listed Transactions

• IRC Section 6501(m), Certain Credits Elected

• Some Forms 2290 (Amended)

• Special Tax Stamp - each location established ASED (Form 11C)

• IRC Sections 6503-6504, Other circumstances

Edited May 15, 2013 by kcjenkins
corrected smileys and copyright symbol.

[JohnH]

Most of those are situations involving examinations, assessments, 3rd-party income, and other unusual situations. There's nothing I'm aware of which requires or anticipates the filing of an amended return outside the SOL period under normal circumstances. But if I'm wrong about this I'd like to know.

I think what has happened in this case is that the previous preparer made a mistake in the first year, compounded it in subsequent years, and has now overreacted. She is doing her best to do some CYA, while trying to hand off some responsibility for the final decision to Gina by asking her to "look over" the amended returns.

[Guest Taxed]

There are two basic statutes of limitation.

First is the statute of limitations set forth in IRC section 6501(a), which provides that the IRS has three years to assess an additional tax due.

This rule has two major exceptions. The three-year statute is extended to six years in a case where the taxpayer has omitted more than 25% of gross income [iRC section 6501(e)(1)(A)].

Second, there is no statute of limitation in cases where no return has been filed, or where the taxpayer has filed a fraudulent return [iRC sections 6501(c )(1), 6501(c )(2), and 6501(c )(3)]. These two exceptions permit the IRS to assess an additional tax at any time.

IRC section 6502(a)(1) establishes a statute of limitation collection period of 10 years.

[gfizer]

There is no understatement of gross income and no fraudulent return filed so neither of those is an issue. I guess the one that concerns me is the 10 years for collection which I understand begins to run when the tax is "assessed." Has the tax been "assessed" in this situation or does "assessment" require some action from either the taxpayer or the IRS?

John is right in that the previous preparer did make a mistake in the first year, which she of course has blamed on her staff, and then compounded it in the subsequent years (except for 2008 which for some reason was prepared correctly). I even believe that she caught her mistake while preparing the 2011 return because she called the client and asked him if he had taken the exemption to which he replied "no", but then she then proceeded to prepare the return incorrectly as if he was exempt. I think she assumed he would continue to use her services and hoped that the mistake would never be caught. Just my opinion....

The previous preparer did not ask me to review the returns, the client did, because he has been a little disturbed about how she has handled this whole mess and is now questioning her integrity. I will not be signing anything related to the amended returns. I just want to be able to give my now-client good advice as to what he should do about filing the amended returns for the years outside of the 3 year SOL.

I appreciate all of the input from you guys. That is what makes this board so valuable!

Thanks,

Gina

[Pacun]

I was hired by an "statutory employee" who makes 70K yearly to prepare her 2008 taxes. W-2 form had only box 1 filled out (no ss had been paid).

I always ask for the previous years return and I noticed that all income was reported on line 7. She told me that she has gone to the same preparer for the past 5 years. I told her the consequences of her actions and I suggested to go back to the previous preparer if she wanted to amend. Without trashing the previous preparer, I did the work I was hired for and I prepared the 2008 return correctly with sch C for 70K without any deductions. All deductions were taken on form 2106 with the 2% floor.

Ironically, in 2010, she got a letter from the IRS stating that she missed a W-2 for 70K. We sent a letter stating that it was reported on sch C and they close the case.

If I am hired to prepare a return, my responsibility is to let them know of the consequenses of their previous actions. Technically, I don't even have to see the previous year's return because each year is different and each year you have to ask the same questions to verify the info.

[Guest Taxed]

Your example is not a clear cut case of understatement of gross income. However the IRS could say it is a fraudulent return! I don't think the IRS manual defines in clear cut way what a fraudulent return is. It is more facts and circumstances. The fact that one year in the middle was done correctly but the other years were not for the exact same item does not explain away incompetence. So then the IRS questions why was it done that way? To lower the tax liability?

I think the taxpayer should take this matter up with the E&O of the previous tax preparer. I will not step into this mess for sure!

[FLORIDA TAX MAN]

QUITE FRANKLY, I HAVE NEVER UNDERSTOOD THE S.O.L. RULES.

IT'S CLEAR THAT IF YOU WANT A REFUND AND IT'S OVER 3 YEARS, YOU ARE SCREWED.

BUT IF YOU OWE, WHAT'S STOPS THE IRS FROM SAYING IT'S A "FALSE RETURN", THEREFORE NO LIMIT.

WHO CARES IF ITS THE PREPARERS FAULT, THE CLENT'S FAULT, OR THE MILKMAN'S FAULT, IT'S WRONG, YOU OWE, WE WANT OUR MONEY...BINGO "FALSE RETURN" NO S.O.L.

THEN AGAIN, IF IT'S OVER 3 YEARS CAN THEY AUDIT YOU ?? iF THEY CAN'T AUDIT YOU, HOW CAN THEY KNOW ITS A FALSE RETURN OR A >25% OMMISSION ???

AS I SAID, i NEVER UNDERSTOOD THE LOGIC OF THESE RULES. THEY SEEM TO CONTRADICT ONE ANOTHER.

[kcjenkins]

Normally, the 6 yr rule comes into play when some outside event, such as an audit of someone else, uncovers information indicating the > 25% omission, or other fraudulent act, occurred.

[Guest Taxed]

There is a reason why it is more "facts and circumstances" that tend to favor the IRS position.

If there is a balance due then it really does not matter whose mistake it was. The omission of the item that is causing the balance due will have the bright light of "fraudulant return" focused on it, until it can be proven otherwise!

If it was clear cut black and white, the clever taxpayers will just make sure they touch the line BUT NOT cross it!

[JohnH]

The standard of proof for fraud is much higher than you (FTM and Taxed) are imagining.

The iRS can't just "say" it's fraudulent - they have to document it.

The most common situations in which IRS does an assessment outside the 3-year SOL is when they develop reliable info through 3-rd party examinations (as KC has already pointed out), and in situations in which a client is already being audited for a 2-year-old return but there is still time remaining on the prior year's SOL. If the auditor develops info which causes them to step back and open the prior year's return, they will ask the taxpayer to voluntarily consent to an extension of the SOL. Sometimes it's wise to consent and other times the best course of action is to refuse - it's all about making a wise decision in that given situation.