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Amending return that has been audited

When the IRS audits a return and disallows a deduction or a negative income item (loss), do they give the taxpayer the opportunity to make other changes to the return to remove optional income items that the taxpayer may only have included to offset the deduction/loss?

For example, say on his 2012 return the taxpayer reports a very large deduction or loss of $50,000, which would be way more than his total reported income for the year. So as not to lose the full benefit of the deduction, the taxpayer decides to change the way he has been reporting interest on his savings bonds, which he has been holding for 20 years, to report all the interest that has accumulated to date, rather than waiting until he cashes in the bonds. By reporting the accumulated interest at the same time he takes the large deduction, assume the two items balance each other out and his tax bill for the year is roughly what it would have been in the absence of both items. Of course having changed his methodology for reporting the savings bond interest, he now has to start reporting that interest every year, so he reports it as required on his 2013 return.

So now let's say in 2014 the IRS audits the 2012 return and decides to disallow the 50K deduction or loss. Now all of a sudden he has a gigantic tax bill from reporting the accumulated savings bond interest. Can he now go back and amend the 2012 and 2013 returns to cancel out the change he made to the way he was reporting the savings bond interest? Since it takes a while for an amended return to get processed, will the IRS work with him on this so that he can avoid paying the large tax bill he now owes until the amended return is processed?

Reply to
William
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Here's my understanding...

You want to change your method of accounting. The first time you changed it (2012), the change was automatically approved by merely filing your return and declaring all the accrued interest. You continue to use that method of accounting in 2013. You can not change from that current method to the prior method without the approval of the IRS. For savings bonds there are two methods to obtain that approval:

  1. Follow the procedure in IRS Pub 550 page 8 or
  2. File Form 3115 with your return.

BUT... you can only do this on a timely filed return for the year of change. In other words, you can not retroactively change your method of accounting. In your example, you can request the change in accounting for 2012 on a timely filed return for 2012. This would include an amended return but only if the amendment meets the due date of your 2012 return including extensions. The IRS will grant an automatic extension of 6 months to the original due date including any extensions that you may have requested. Translating this into english, if you file 2012 by

4/15/13, you would have until 10/15/13 to amend with a request for change in accounting method. If you request an extension to file 2012 by 10/15/13, then you would have until 4/15/14 to file that 2012 amended return with the request for a change in accounting.
Reply to
Alan

Here's my understanding...

You want to change your method of accounting. The first time you changed it (2012), the change was automatically approved by merely filing your return and declaring all the accrued interest. You continue to use that method of accounting in 2013. You can not change from that current method to the prior method without the approval of the IRS. For savings bonds there are two methods to obtain that approval:

  1. Follow the procedure in IRS Pub 550 page 8 or
  2. File Form 3115 with your return.

BUT... you can only do this on a timely filed return for the year of change. In other words, you can not retroactively change your method of accounting. In your example, you can request the change in accounting for 2012 on a timely filed return for 2012. This would include an amended return but only if the amendment meets the due date of your 2012 return including extensions. The IRS will grant an automatic extension of 6 months to the original due date including any extensions that you may have requested. Translating this into english, if you file 2012 by

4/15/13, you would have until 10/15/13 to amend with a request for change in accounting method. If you request an extension to file 2012 by 10/15/13, then you would have until 4/15/14 to file that 2012 amended return with the request for a change in accounting. =================== If the method of accounting was changed in an audit, one can amend other open years WITHOUT filing a 3115. In lieu of the 3115, one cites the audit report (or other written communication from the IRS; either way it should be attached as substantial authority) as the reason for change. It doesn't matter if the report is merely proposed or final; either way, as a taxpayer, you're entitled to file a protective claim to protect your right to refund for any related changes in related periods (years).

In the situation proposed above, the item the taxpayer wants to change is NOT AFFECTED by the changes in the audit. Therefore, a 3115 is required UNLESS the agent accepts and makes the taxpayer-requested change (in which case it goes on the audit report).

Reply to
D. Stussy

I can't find any authority for your point. I.e., you can retroactively change a method of accounting that correctly reflected income because an audit disallowed a deduction. The only authorities I am aware of from my files are: Pacific National Co. v. Welch, 304 U.S. 191 Lord v. United States, 296 F.2d 333 , 9th Cir National Western Life Insurance Co. v. Commissioner, 54 T.C. 33

The last case may also be on point.

Reply to
Alan

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