Agent says that 2004 MFS return CANNOT be amended

[Jack from Ohio]

New clients to us.

Wife filed her 2004 return as MFS. Husband did not file any since 2003. Filing MFJ would help tremendously as he has $40K profit Sched C. Her income was only $6,000.

IRS sent husband a letter of intent to levy and got his attention. He owes $3K in back taxes from years prior to 2004. He contacted the IRS to set up a payment arrangement and was told that the 2004 needed to be filed before they could set up the payment schedule. He brings us the 1099MISC and his expense documentation and we prepare an amended 2004 return as MFJ.

After getting the POA and calling the IRS to make sure who to send the amended return to, the agent very strongly said that they are not allowed to amend to change filing status since it has been 3 years since her return was filed. This would mean filing him as MFS and making a big difference in the tax owed.

Now the question:

Is the agent correct about not being able to amend after three years to change the filing status? This is a new concept to me. I was of the mind that after 3 years you could not get a refund caused by an amended return, but there was no time limit for amending returns for correcting errors or omissions.

Have I missed something all these years, or is the agent confused? This was an agent at the Practitioner Hotline.

Any thoughts or information to help educate me here?

[Lion EA]

Pub. 17 states: "If you or your spouse (or both of you) file a separate return, you generally can change to a joint return any time within 3 years from the due date of the separate return or returns. This does not include any extensions." It does not cite the Tax Code but does refer to Pub. 501. For a substantial tax difference, you'll want to research further.

[jainen]

>> It does not cite the Tax Code <<

As I understand it, amended returns are more a matter of administrative convenience, although the tax code does have certain references to amendments for specific issues. Generally the IRS is free to accept, deny, or ignore amended returns according to their own standards. In my opinion, taxpayers have little grounds for appeal unless they can show they are not getting equal treatment.

[kcjenkins]

He's going to have to pay the price of his own bad decisions. Don't feel too bad for him, it was his choice not to file, when he knew he had significant income. Just file it as MFS, and add that amount to the installment request total amount. That is the best you can do at this point, because accepting amendments is the option of the IRS, and they have long had the three year rule on changing from MFS to MFJ.

[JohnH]

Just brainstorming here, but what would it hurt to try filing a 1040X and see what happens? After all, this isn't a case of two separate MFS returns being combined to change to a MFJ. Rather it's a case of a MFS return being amended and additional income being reported, along with a change to MFJ.

Might be just enough of a gray area for it to slide through. There's no clear prohibition against filing that way, and it seems that the worst thing IRS would do is send it back with instructions to file the second return MFS, which basically puts you back to square one. What's the harm in trying?

[jainen]

>>What's the harm in trying?<<

Ummm -- double taxation on the spouse who already filed? Penalty for filing a frivolous return after being specifically warned? Delay in qualifying for the payment agreement (which was the real goal), with accelerated collection action? Wifey now personally responsible for the rest of the tax liability?

Ah, never mind, I'm just a pessimist. It would probably work out fine. It's not like the IRS computers check to see if a Social Security number is already on a different return or anything.

[JohnH]

Good points and no real disagreement here, although I'm not persuaded by the "frivolous return" argument. I doubt verbal information from a single IRS rep on the phone would amount to much in the total scheme of things. I don't pay too much attention to what they tell me on the phone when the answer isn't what I want to hear. Sometimes I just make another phone call & see what a different agent says to me. Amazing how often the responses are vastly different.

I was assuming the issues of spousal liability had already been explained and that the spouse was OK with that, otherwise the issue wouldn't already be under discussion. Delay in getting the payment agreement is no big deal, PROVIDED acclerated collection action can be avoided. (The interest is a non-issue because the taxpayer obviously can't pay the balance in full, so what's another month or so of delay going to matter, if it can be achieved?)

As for whether it might slide through, let me just say I've seen stranger things happen...

[RitaB]

Regarding "Stranger Things" and "IRS Computers"

Wifey filed 2006 Return as MFS in Feb 2007 against my recommendation. In March 2007, she realized she made a mistake, and when Hubby was ready to file, I amended her return to add his info. Of course, she was the Taxpayer and he was the Spouse because of this.

Next year, when I did their MFJ return, I listed Hubby as Taypayer, Wifey as spouse. Well, guess what? There was big time chaos because IRS computers couldn't find where they filed for 2008 because of the flip flop with the Taxpayer/Spouse designations.

So, I'm not so sure that those computers catch everything...

But enough about me. I think I like John's idea. I believe it might just be a keeper.

[BulldogTom]

I am going to have to disagree with you Rita. This is a taxpayer who is already on the IRS radar as a non-filer and non-payer of taxes. I am assuming the agent who told Jack to file MFS was from the department that issued the intent to levy (in other words, he called the number on the letter). They know what they want to see when that return comes in. If they think the taxpayer and his representative are just going to ignore what they told him to do, it could get even worse for the taxpayer, as in "substantiate every line on your schedule C or we are disallowing every claimed deduction". If this taxpayer was not on the radar already, I think I would file it at the service center and roll the dice, but as Jack has already been told to file it MFS, I think it is pushing too hard to file MFJ.

Just my humble opinion.

Tom

Lodi, CA

[kcjenkins]

And Tom's reasons are my reasons for also advising that you just go ahead and file it MFS and accept the consequences. If he were not already in the spotlight it would be a different situation, but he is, so 'trying' is not going to work anyway. His SSN is already 'flagged' so you can not just slip it in and hope for good luck.