Discovered an error in a prior year’s tax return?
Everyone is busy preparing US tax returns for 2023. Taxpayers should note that thorough preparation of the current year’s tax return should include a review at least, of the return filed for the prior tax year. (Taxpayers using new return preparers should be wary if the preparer is not asking to see prior years filings). As a result of such review, a taxpayer may discover an error in the prior year’s return. The question arises if he should amend that tax return and the effects of doing so.
Today’s post examines the issue of amending a tax return under some common fact patterns prevalent to the American living abroad. It also addresses a common concern that filing an amended return may extend the statute of limitations.
Common errors with overseas tax returns include income omissions and failing to file certain IRS information returns with respect to ownership of foreign assets. Let’s take a closer look at the US tax implications when such errors are made.
Income Omissions
This happens in the foreign context quite often. Taxpayers living and working overseas who receive certain amounts or in-kind benefits from their employers often do not realize that these must be included in income. Examples include when the employer provides airline tickets home for the taxpayer and his/her family; or pays tuition directly to the school where the taxpayer’s child studies abroad.
Housing allowances for taxpayers abroad are also a common source of confusion. If the taxpayer owns his own home (as opposed to paying rent for his accommodation), the taxpayer cannot utilize the Foreign Housing Exclusion to exclude from income the housing allowance paid by his employer. For those entitled to claim the exclusion, some taxpayers mistakenly believe if they use only a portion of the employer-provided housing amount, they can still exclude the full amount permitted under the foreign housing exclusion rules. This is not so. The taxpayer must actually incur the claimed amounts in rental or other permissible payments. Often both spouses are employed and both receive housing amounts from their respective employers. In this instance, only one housing exclusion can be claimed.
If the amended return means that the taxpayer owes money, filing as soon as possible may minimize any penalties or interest that might be incurred. The IRS can still assess a penalty or charge interest with regard to amended returns. These can be assessed for failing to pay the correct tax amount when the taxes were originally due.
Foreign Assets Information Reporting
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. My blog post here gives all of the details.
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, 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.
We frequently see omissions of Form 8938, commonly called “FATCA Reporting”. Form 8938 concerns special tax information reporting for “specified foreign financial assets”. Sometimes taxpayers neglect to file this form, since it is often confused with the so-called FBAR and if the taxpayer has filed an FBAR he may mistakenly believe he has done all that is necessary. If a taxpayer should have filed this form but did not, amending the tax return to include the Form 8938 to get the statute of limitations running is usually the safe course. Please see my blog posting here for more detailed information regarding Form 8938.
We 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. See explanation at my earlier blog post. 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, my blog post discussion of 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.
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 2010 tax year was received on April 3, 2014, the IRS would have 60 days from April 3 to assess any additional tax due on that income tax return.
My blog post here reviews the various civil statutes of limitations rules that apply to US tax matters. There are different rules (of course!) for different tax scenarios.
How To File an Amended Tax Return
Use Form 1040-X (PDF), Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040 (PDF), Form 1040A (PDF), Form 1040EZ (PDF), Form 1040NR (PDF) or Form 1040NR-EZ (PDF).
Electronic filing is now available for Form 1040-X. Taxpayers can file Form 1040-X electronically with tax filing software. See this recent IRS FAQ on how to amend tax returns. Note however, that returns older than the current or prior two tax periods cannot be amended electronically. Amended returns for those earlier tax years must be paper filed.
To claim a refund, Form 1040-X must be filed generally no later than the date that is 3 years after the date the original return was filed or within 2 years after the date the tax was paid (whichever is later). Returns filed before the due date (without regard to extensions) are considered to be filed on the due date.
A separate Form 1040-X must be filed for each tax year the taxpayer is amending. Taxpayers should be sure to enter the year of the return that is being amended at the top of Form 1040-X.
Taxpayers can check the status of the amended return using the Where’s My Amended Return? (WMAR) online tool three weeks after having filed the amended return. The WMAR tool allows one to track the status of amended returns for the current year and up to three prior years.
The IRS Interactive Tax Assistant can help taxpayers decide if an amended return is necessary. Taxpayers can use the Should I File an Amended Return? tool in the Interactive Tax Assistant on IRS.gov to help decide if they should file an amended return to correct an error or make other changes if they already filed.
Posted March 21, 2024
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