Should you amend a tax return?

In my last blog I ended by stating the I didn't always recommend that a client amend a tax return to apply for the full refund to which he or she might be entitled.  Why would I do that?  Why wouldn't I want my client to have every penny of their hard earned money refunded by the government?  What kind of CPA am I?

I'm a cautious CPA.  First let me say that I always do what the client wants, as long as it's legal.  But here are some reasons why it might not be the best idea to amend a prior year's tax return.

Every tax return carries a statute of limitations based upon when it was filed.  That time period for personal taxes or 1040s is three years.  If you file, that is submit your tax return to the IRS, on April 15, 2013, for tax year 2012, the IRS has until April 15, 2016, to question the return.  After that date, no more questions.  Unless fraud, that is out right lying on the return, is suspected, then these rules don't apply.  But for this discussion we're going to assume no fraud.

How do you know for certain when the statute begins?  The IRS will have a record of when the tax return was received and you'll know that as well based upon the date on your copy of the return.  You can go to the lengths of sending your tax return via return receipt if you wish but I've never had a client do that unless they were really worried or under the gun by the IRS for some reason.  Of course, if you file electronically, which is becoming more and more popular, then you know exactly when the return was received and accepted by the IRS.

So what does all this have to with amending a tax return to get back more money?  When a tax return is amended, the statute of limitations is extended.  That's not usually a problem but it is a consideration.  If the amount to be refunded with an amended return is $50, the tax payer might not want to extend the time the IRS could examine the return for that small amount.

Another consideration is cost to prepare the amended return.  As far as I'm concerned, if I made the mistake, then I correct it for free.  For example, if the client brought in the information and I failed to get it onto the tax return, then after I explain everything to the client - that is my mistake and the statute of limitations - if he or she wants to proceed, then I prepare the amended return for free.  On the other hand, if the reason for the amended return is that the client forgot to bring me some information, then they have to pay for the preparation of the amended return.  And that brings us to the second reason for not requesting the refund.

It takes a lot of time to prepare an amended return.  It might cost $200 to prepare the amended return to receive a $50 refund.  Not very cost effective, however, I did have a client with this situation and he insisted that I prepare the amended return even though he would be paying me more than he would be getting back from the IRS.  His reasoning was that the government wasn't going to keep a penny of his money that it didn't deserve and he didn't care how much he had to pay me to get it all back.  I didn't agree with this reasoning but if that's what he wanted to do, I was happy to collect the fee.

There you have it.  My two main reasons why I don't always suggest preparing an amended return to get back a refund.  Next blog:  How much should I be paying to have my taxes prepared or do CPAs really read 900 pages of tax law or maybe I'll talk about year end payroll taxes and W-2s?  If any of my readers want one topic more than the other, let me know in the comments sections.  Until next time Happy Taxes!