Amended Tax Returns and the Statute of Limitations

While an amended return is fundamentally a corrected compliance filing, a longstanding belief persists that such filings may increase the likelihood of an Internal Revenue Service (IRS) audit. Understandably, most taxpayers seek to avoid the inconvenience and scrutiny of an examination — even when it involves correcting known errors. This leads to further questions: Does filing an amended return extend the statute of limitations? Is granting the IRS additional time to audit truly in the taxpayer’s best interest? In the absence of clear guidance, these uncertainties can be daunting and may discourage proactive compliance.

Concerns about filing an amended return can quickly be alleviated by better understanding the tax laws and the IRS rules and procedures. First, the IRS makes its audit selections based on various factors, and based on published guidance, none of which are solely related to whether or not a return is amended. A computer scoring system calculates a discriminant function system (DIF) score for all returns and compares scores and ratios amongst similar types of returns to search for anomalies. When a score indicates that a return is an outlier, this may trigger a review of the information. Similarly, the IRS uses other means to look for inconsistencies in data, such as the reporting of 1099 or W-2 income. If the information on a recipient’s return varies from the forms filed, this also may trigger an audit. Lastly, the IRS may simply audit large taxpayers or those related to other ongoing examinations more frequently.

There are many factors which may trigger an audit. While filing an amended return is not itself an audit trigger, the IRS may audit or review an amended return just like an original return, for example, to confirm the factual or legal basis for items on the return.

When it comes to the statute of limitations (SOL), it is important to understand the general rule and then how it is impacted by an amended filing. The SOL is the time period established by law during which the IRS can audit a return for inaccuracies and assess a deficiency to recover unpaid taxes. For income tax, this generally expires three years after the later of the date a tax return is filed or two years after the date the tax is paid. If a taxpayer omits gross receipts by more than 25%, the SOLis extended to six years. If a return is never filed, or if a filed return is deemed fraudulent, there is no SOL; the IRS can pursue recovery of the unpaid or underpaid tax in perpetuity.

If a tax return is amended more than 60 days before the end of the SOL, the original filing and payment dates dictate when the SOL closes. However, if a tax return is amended within that final 60-day window, the effect of the corrected liability impacts whether the SOL is extended or not. It’s important to note that the statute will never start over for the full three years. Instead, if the amended return results in an increase in tax payable, and if the filing is submitted within 60 days of the end date of the original SOL, then the IRS is allowed another 60 days after it receives the return to examine and assess for additional tax. If the amended filing does not report an increase in tax payable or lowers the tax payable, then there is no extension on the original SOL. This may provide an important planning opportunity where a position taken on an amended return may be uncertain.

Understanding the statute of limitations rules surrounding amended tax returns empowers taxpayers to make informed decisions without unnecessary fear of audit exposure. The reality is straightforward: filing an amended return does not automatically trigger an IRS examination, and the impact on your statute of limitations follows predictable patterns based on timing and tax liability changes. Rather than allowing uncertainty to prevent proactive compliance, savvy taxpayers recognize that professional guidance transforms complex tax situations into manageable strategies. If you have questions about whether an amended tax filing is in your best interest, please do not hesitate to contact us.

Authors: Mark Loyd, Esq, Dentons | [email protected] and Raymond V. Owens, CPA, Withum Team Leader, Cannabis – Tax | [email protected]