How to Fix an Erroneous Filed Tax Return without Penalties

But what if you discover an error or omission on a return already filed with the IRS that needs to be corrected and it is still before the extended due date? The advantage of fixing the return now, before the due date, is that the possibility of accuracy-related penalties associated with the incorrect information could be eliminated.

As a summary:

  • An amended return is one filed after an original return and after the due date (including extensions).
  • A superseding return is one filed after an original return but before the due date (including extensions).

Amended returns essentially exist along with the original return. Superseding returns, on the other hand, replace an originally filed return.  When a superseding tax return is filed, it is as if the original return was never filed. How to file a superseding return is not simple. Every return is different.  Some returns have a specific box to check, others require the use of separate amended return forms (such as Form 1040, U.S. Individual Income Tax Return, which requires a Form 1040-X, Amended U.S. Individual Income Tax Return).

The ability to file a superseding tax return is time-limited, but where available it is often the best way to correct a previously filed return.

A taxpayer can file a superseding tax return at any time after filing an original return and before the due date for filing such a return has passed. Thus, a taxpayer whose return is due on July 15, 2020, but who decides to file on May 10, 2020, can file a superseding return anytime between May 10 and July 15, making any necessary adjustments. The superseding return will be treated as the taxpayer’s original return for all purposes. Thus, if the original return underreported the taxpayer’s tax liability, the superseding return can correct that underreporting while avoiding the accuracy-related penalty normally imposed. This is so even if the taxpayer does not have reasonable cause for the omission, as the superseding return effectively removes the omission from the record.

For the purposes of a superseding return, the due date includes any valid extension, for example to October 15, 2020. Therefore, a taxpayer who files a valid extension but ultimately files the return sometime before the expiration of the extended filing date will have until that extended due date to file a superseding return.

The benefits of filing a superseding return go beyond the ability to correct errors without risk of an accuracy-related tax penalty. Because a superseding return is treated as the taxpayer’s “first return,” it can be utilized to make or change binding elections that would otherwise not be open to revision. This is perhaps even more valuable than avoiding penalties, especially for corporate and business filers, where a single missed election can have devastating consequences that affect future tax years. In fact, court cases and IRS rulings have held that a superseding return even allows for the revocation of an election that is otherwise irrevocable.

Superseding returns have other big benefits. If a taxpayer is required to file an information return (such as Form 5471 or 8938) but fails to do so, a superseding return can be used to rectify the error. If a taxpayer catches the omission of Form 5471 after filing the original return but before the due date has passed, he or she can file a superseding return and attach the required Form 5471, making it timely filed.

To make the most of superseding returns, tax advisors should consider filing extensions even for taxpayers who will ultimately file their returns on the original due date. By doing this, such taxpayers will have extra time to catch mistakes and correct them without negative consequences. While it is impractical for tax advisors to do this for all of their clients who file their returns by the original due date, it is a good strategy for some of complex filers. For example, filing an extension may be good practice for a partnership that files Form 1065 and issues K-1s by the original due date. Such a partnership may itself receive amended K-1s from higher-level partnerships after making its original filings, and such revisions may then subject it to filing obligations that it had not previously foreseen.

Another option is a “Qualified amended return” (QAR) pursuant to Regs §1.6664-1(b)(3), which allows a taxpayer to avoid an accuracy-related penalty for a substantial understatement on an original return.

For taxpayers who miss the limited time period for filing a superseding return, you may still avoid the accuracy-related penalties for an understatement of tax by filing a qualified amended return. Generally, a qualified amended return is filed after the due date for the original return has passed but before the IRS has taken certain actions that either put the taxpayer on notice of a possible understatement or otherwise indicate that the IRS is already on the path to independently finding the understatement. Hence, a qualified amended return must be filed before any of the following has occurred:

  • IRS contact with the taxpayer regarding a civil or criminal examination (audit) of the tax return at issue;
  • IRS contact with any person regarding a tax shelter examination under IRC section 6700 for a tax shelter in which the taxpayer has participated;
  • In the case of a pass-through item, IRS contact with a passthrough entity regarding the item at issue;
  • IRS service of a summons relating to the tax liability of a person, group, or class that includes the taxpayer (or passthrough entity) with respect to an activity for which the taxpayer claimed any tax benefit; or
  • IRS announcement of a settlement or compromise initiative with respect to a listed transaction that the taxpayer participated in that year.

When a taxpayer properly files a QAR, except in case of fraud, the IRS will not generally assert the accuracy penalty with respect to any additional liability.