Overseas Americans: Fast Facts About Amending a US Income Tax Return

Soon enough thoughts will turn to preparing US tax returns for 2022.  Thorough preparation should at least include a review of the tax return filed for the prior tax year. In doing this, it often happens that taxpayers discover an error occurred in filing a prior year’s return.  If an error is discovered, it may be wise to amend the tax return. Here are some fast facts regarding amending a tax return:

Must I Amend?

Let’s dispel a myth that I commonly encounter regarding a taxpayer’s obligation to file an amended return.  Put simply, there is no such obligation.  Neither the tax law nor court cases require filing an amended return to notify the Internal Revenue Service (IRS) of the error. The United States Supreme Court case of Badaracco v. Commissioner, 464 U.S. 386, 394 (1984), noted “the Internal Revenue Code does not explicitly provide either for a taxpayer’s filing, or for the Commissioner’s acceptance, of an amended return; instead, an amended return is a creature of administrative origin and grace.” Even if the taxpayer did not believe the return was correct and truthful when originally filed, there is still no duty to file an amended return (and filing one will not help reverse the crime already committed when the original fraudulent return was filed)!  See Badaracco, 464 U.S. at 397.

Should I Amend?

The IRS may correct errors in math on a return and may accept returns without certain forms or schedules. Generally, if a form or schedule is missing the IRS may request it be prepared and sent. A very general rule of thumb is that one should  file an amended tax return within three years of the date the original return was filed or within two years after the date the tax was paid, whichever is later.

As more fully discussed below, for Americans abroad this general rule is subject to a significant exception if foreign information returns are missing from the originally filed return. Americans living overseas have additional concerns with respect to whether they should file amended returns when they notice a schedule or form is missing from a previously filed return.

Typical Instances When One Should Amend a Return

Below is a list describing typical instances when a taxpayer should consider to file an amended return. Filing an amended tax return is suggested when the taxpayer:

  • Received additional or amended tax forms or statements from employers, banks or investment brokers (e.g., W-2 or 1099 forms) after the tax return had been filed.
  • Carelessly omitted or forgot to report income.
  • Overlooked tax deductions or credits that could have been claimed (this frequently happens with educational credits or foreign tax credits).
  • Improperly claimed deductions or credits for which the taxpayer was not eligible.
  • Failed to claim a dependent the taxpayer was entitled to claim, or claimed someone he was not permitted to claim.
  • Used the incorrect tax filing status.

 Will Filing an Amended Tax Return Extend the Statute of Limitations?

Many people fear that filing an amended tax return will cause the statute of limitations to be extended. In general, the filing of an amended tax return does not extend the statute of limitations on assessment.  If an amended return is received by the IRS within 60 days from when the assessment statute expiration date would otherwise expire, then the IRS is granted a period of 60 days from the received date to assess additional amounts of tax on that return. See IRC Section 6501(c)(7). For example, if an amended income tax return for the 2018 tax year (with due date April 15) was received on April 3, 2022, the IRS would have 60 days from April 3 to assess any additional tax due on that income tax return.

Can an Amended Return be Filed Electronically?

Yes. If one needs to amend 2019, 2020 or 2021 Forms 1040 or 1040-SR, the taxpayer can now file Form 1040-X, Amended U.S. Individual Income Tax Return electronically using available tax software products.  Additionally, amended Form 1040-NR and amended Form 1040-SS/PR can now be filed electronically for tax year 2021.  However, some amended returns must be filed by paper:

  1. Any amended Form 1040 and 1040-SR returns older than three years, or Form 1040-NR and 1040-SS/PR returns older than the current year cannot be amended electronically. Amended returns for any other tax years or tax forms must be filed by paper.
  2. If amending a prior year return originally filed on paper, then the amended return must also be filed on paper.

IRS has FAQs covering the topic of amending tax returns here.

Forgotten Forms Regarding Foreign Assets

Under provisions of the notorious “Foreign Account Tax Compliance Act” (FATCA), the statute of limitations does not begin to run until the taxpayer has complied with all mandatory foreign reporting. Briefly, for those unfamiliar with the concept, the tax law statute of limitations prescribes the length of time permitted to the IRS to enforce the tax rules. If the length of time runs out for a particular tax year, then the IRS is forever barred from claiming that more tax is owed in that year. It is important to understand how the tax statute of limitations works, because in certain cases, the statute of limitations will be longer than others or it will not start to run at all.

With respect to reporting of foreign accounts or assets, reporting can include information returns regarding ownership in foreign corporations, foreign partnerships, foreign trusts, information concerning “specified foreign financial assets” and many other transactions in the offshore context.  Only when proper reporting is made will the statute of limitations clock begin to “tick”. If a taxpayer has omitted a foreign information return and later files it with an amended return, even though the statute of limitations clock will start ticking at that time, the entire tax return (rather than only for the portions of the return relating to the foreign reporting that had been missing) will remain open for IRS adjustments for a period of three years.

Don’t Get Caught Out

I frequently see failures to file Form 8938, commonly called “FATCA Reporting”. Form 8938 concerns special tax information reporting for “specified foreign financial assets” (such as ownership in non-US accounts, corporations, partnerships, trusts, pension plans and the list goes on. It includes notes, bonds, debentures, or other debt issued by a foreign person; interest rate and currency swaps, as well as other agreements with a foreign counterparty (such as foreign life insurance contracts).   Form 8938 is required if certain dollar thresholds are met. The thresholds vary depending on the taxpayer’s filing status and whether the taxpayer is living overseas or stateside.  If a taxpayer should have filed this form but did not, the return should be amended to include the Form 8938 to kickstart that all-important statute of limitations.

I also frequently see omissions of information returns required of US owners of foreign business entities such as a non-US partnership or a non-US corporation, for example. Form 5471 is one reporting form that involves significant disclosure of US owners of foreign corporations.  If the corporation qualifies as a so-called “Passive Foreign Investment Company” (PFIC) the US shareholders of a PFIC must file Form 8621 in certain cases. Form 8621 requires significant disclosure and can be accessed here. In addition, depending on the circumstances, other filing requirements may arise. See for example, Form 926, “Return of a US Transferor of Property to a Foreign Corporation,” to report transfers of property to a foreign corporation, including certain transfers of cash.

Such errors can often be corrected without imposition of penalties through one of the IRS special relief programs – Streamlined Filing Compliance Procedures or Delinquent International Information Returns Procedure.

Let me know if you need help.

Posted January 5, 2023

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