Most tax planning involves the future. But you can also hit pay dirt by looking back. The Internal Revenue Service generally gives you three years after you file a return to revise it. The march of tax changes in recent years has made it easier to err, and the new tax law will only aggravate the problem. Maybe you forgot to claim a deduction or want to reduce interest and any penalty by contacting the IRS with a mistake before the feds discover it.
Surprise refund. The IRS expects to receive 3.4 million amended returns this year. Bob and Ruth Goldwyn, both 67, are among the revisers. When the retired New Jersey couple sold their four-bedroom home in 1999 and moved into an apartment, they were told by their tax preparer that they owed tax on their $114,169 profit. But earlier this year they showed a new accountant their past returns. Surprise! They did not have to pay tax because of a 1997 change in the tax code that exempts up to $250,000 of profit from a home sale--$500,000 for couples filing a joint return. The Goldwyns last week got a $30,375 refund--plus interest--after filing an amended return on form 1040X to correct that, along with other mistakes. "I didn't understand why I had to pay so much tax, but I went along with it," says Bob. "Now I feel a lot better.
Amending a return will usually not trigger an audit. "If a claim is legitimate and worth the cost, I have no problem filing a new return," says accountant Joseph Joyce in Elgin, Ill. Most changes get no more scrutiny than if you made the claim on an initial return, says Douglas Stives of Wiss & Company in Red Bank, N.J., the Goldwyns' new accountant. You're still more likely to run afoul of the IRS by taking a deduction for a home office than by updating an easily documented deduction for property tax. Adds Stives: "It's very rare for the IRS to use a revision of one part of a return as a reason to look at another unrelated area."
Still, some accountants advise attaching documentation to an amended return, even though you might not do so regularly.
By Leonard Wiener
U.S. News and World Report (August 6, 2001)