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How to apply for a federal tax refund after you've
HOW TO APPLY FOR A TAX REFUND AFTER YOU'VE FILED --
AND HOW IT MIGHT FINANCE YOUR BUSINESS
It is very easy to file an amended federal tax
return, and normally you may do so within three years
of filing the original return (or two years of paying
the tax).
This is not something that will cause an audit,
but if you are the nervous sort you can wait until just
before the three year deadline. In that case the three
year statute of limitations on the original return will
have expired, and only the amendments can be audited.
But there is really no reason to wait, and you can put
the money to better use than the government. (The only
exception to this is that if you have a refund pending
for the same year, it is better to wait until you
receive it before filing the 1040X.)
State returns can also be amended, but you will
have to check with your state for details.
It does not matter what type of form you used
originally -- 1040, 1040A, or 1040EZ. Perhaps you
filed 1040EZ and realized later that there were
deductions you failed to take. A Form 1040X is the
amended return to use in all personal income tax
claims, and all you have to do is calculate what your
original return should have been.
1040X is also the form to use if you discover that
you made a mistake the other way. To take an extreme
example, if you claimed an exemption for the family
dog, you can correct yourself with a 1040X. It won't
cancel your original sin, but coming forward with the
correction yourself can do much to alleviate the
consequences. (The IRS reports that an amazing number
of children disappeared the year after the requirement
for listing a child's social security number on the
return to claim an exemption took effect.)
Anything on your return can be amended with 1040X.
So if you see items that might have made a difference
in your last three year's tax returns, get out your
copies and recalculate the return as if you had
originally deducted those items. Then transfer the
results to Form 1040X.
If the changes require a schedule that was not
attached to your original tax return, you can add it to
Form 1040X. For example, supposing you listed
miscellaneous income as a line item on your 1040 but
did not treat it as a business. You now realize that
if you treated it as a business you could deduct the
expenses related to it. All you have to do is complete
a schedule C for the year in question, include the
results on 1040X, and send it in.
Since the forms change from year to year, you may
need to get a schedule, return, or instructions for the
prior year. The forms are available from the IRS for
several years afterwards. Just write to IRS Forms
Distribution Center, Box 25866, Richmond VA 23289 and
list the forms and years that you need. Let them know
if you need instructions for that year (for example,
because you need the tax table or exemption information
for that year). Usually they have the old instruction
books also.
If the instructions for the year you need are out
of stock at the IRS, most public libraries keep several
year's worth of basic tax information books, such as
the annual J. K. Lasser tax guide, which will give you
the necessary tax table information.
Another IRS form, number 843, covers refund claims
that are not part of a personal tax return. Form 843
allows a claim back for three years for such things as
overpayments of excise taxes, withholding taxes on your
maid, or corporation income taxes.
There is one area in which a refund of back taxes
can work miracles. Most business losses in excess of
the current year's income (whether proprietorship,
share of partnership, or Subchapter S corporation)
carry back for three years -- not just forward into
future years. This rule also applies to charitable
contributions that exceed the limit for the current
year.
In both of these cases, you can use the amount of
deduction that you can't use in the current year, and
get a refund of the taxes you paid in the earlier
years, up to the point that the entire loss credit is
used up.
You can also do this more than once. For example,
you have a current year business loss which gets you a
refund of all of the third prior year's taxes and part
of the second prior year's taxes. If next year you
continue to have a loss, the second prior year is now
the third prior year, so it hasn't been wasted. It is
not too late to get back the rest of the taxes you paid
that year. In other words, two refunds for the same
year! (It is not impossible to have three refunds for
the same year -- if first filed a 1040X in the current
year for deductions you overlooked, then in two future
years had a business loss that you could carry back.)
Business losses can be carried back without using an
amended return on Form 1040X, if you use Form 1045 to
claim the refund within 12 months after the end of the
year in which the net operating loss or credit
occurred. (Corporations can do the same thing on a
Form 1139, to get a refund on earlier corporate taxes.)
If it is after the deadline to use a Form 1045, you
haven't lost out. The same carryback loss can be used
to claim a refund up to three years back, but it must
then be done by using Form 1040X to amend the year for
which the refund is being taken.
It's your money -- don't let fear of the IRS keep
you from claiming it. And that cash in your pocket now
is more valuable than the possibility of crediting the
loss towards some future year's income.
This technique can also help finance a business.
Supposing, that you lost a high salaried job, as so
many have in recent years, on which you were paying
high income taxes. Tax refunds could be a reason to
start your own business immediately, even if you are
still looking for another job. You open a business
which has first year losses, a fairly normal situation.
Immediately after the end of the first year (which
might be only a partial year if you opened the business
late in the year) you file a 1040X to carry those
losses back to the third prior year, thus raising cash
to finance the business. For a high-salaried executive
going into his own business, timing this can be a very
valuable part of tax planning -- you may want to cram
all the deductions you can into that first tax year of
business in order to get the largest possible refund
from an earlier year for financing your business today.
And this financing is free money -- it is taxes you
already paid and that will be lost forever once the
three year time limit goes by.
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