How to Amend U.S. Business Income Tax Returns
U.S. corporations as taxpayers may realize an error for a few reasons after filing an income tax return, including from basic mathematical miscalculations to full fraud. Upon identifying an error, taxpayers must contact their accountants as soon as possible to decide how to rectify it by filing an amended return.
The following explains some of the factors to take into account as well as the applicable procedures to take if an error is found and an amended income tax return needs to be filed.
- Reasons to Amend Business Income Tax Returns
There are some conditions that may call for an amended income tax return:
(1)
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Overstated profits lead to overstated income tax liabilities, in this situation, a refund of excessive taxes would be requested on the amended income tax return.
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(2)
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Understated profits lead to understated income tax liabilities, in this situation, in addition to paying the underpaid income tax, the motivation of the taxpayer is probably the potential risk of facing penalties and interest.
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(3)
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Apply for income tax refund by using an NOL (Net Operating Loss) carryback or foreign tax credit carryback.
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- When to Amend Business Income Tax Returns
In order to submit an amended income tax return, it is necessary to adhere to time limits for filing the amended income tax return. It is important to note that in situations involving refund claims, the statute or regulations may assign a different date as the filing date or payment date.
(1)
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Time limits for the statutory assessment
(a) In accordance with standard practice, the IRS typically has a period of three years starting from the date of the tax return filing or three years from the date of any payment made towards the tax liability, within which they can evaluate and impose any additional tax.
(b) Significant omissions of total income (exceeding 25 percent) permit a duration of six years for an assessment.
(c) In regard to fraudulent returns, there is no specified timeframe for conducting assessments.
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(2)
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Time limits for amended income tax returns
In accordance with the IRC, there are specific time limits, usually set at three years, within which individuals are permitted to submit an amended tax return. The IRC also establishes a time limit for refund claims, which must typically be filed no later than three years after the initial return was filed or two years from the date the tax payment was made.
In particular, carryback claims to offer an extended time limit for amending tax returns. To illustrate, claims for foreign tax credits can be carried back up to a period of 10 years. It is noted that carrybacks frequently have implications for multiple years, as they can impact subsequently filed returns and may require the submission of additional amended income tax returns.
The IRC regulates that refunds are typically not granted if the specified time limits are not adhered to through the submission of a timely amended income tax return.
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- How to Amend Business Income Tax Returns
It is necessary for refund claims to include comprehensive information regarding the reasons for the refund, along with sufficient factual details to inform the IRS about the basis of the claim. In accordance with IRS regulations, it is typically required to submit amended income tax returns using the designated IRS forms.
(1)
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For individual returns, including sole proprietorships, the required form is Form 1040X.
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(2)
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For corporations, the required form is Form 1120X.
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(3)
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For partnerships, the relevant form is Form 1065X. Form 8082 may also be required for partnership-amended returns.
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(4)
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For S-corporations, the required form is Form 1120S (check box H (4) on page 1 to indicate an amended return).
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- Penalty to Underpaid Liability
The Internal Revenue Code (IRC) enforces penalties for various infractions, including significant underpayments of tax liability and understatements that arise from negligence or non-compliance with rules and regulations. Typically, the penalty imposed is equivalent to 20 percent of the resulting understatement.
The Internal Revenue Code (IRC) enforces both civil and criminal sanctions for the submission of fraudulent tax returns. It should be noted that taxpayers who file an amended income tax return, including a Qualified Amended income tax return (QAR), will typically not be shielded from these penalties if the initial return was found to be fraudulent.
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