I was doing 2006 tax and found out in 2005 I deducted too much on a certain item should have belongs to 2006 deduction. It is simple to work out the extra tax liability and no ambiguity that I can think of. Therefore for 2005 I received slightly too big of a refund,
1040X and 540X was prepared and I am ready to mail it in, with 2 checks for the balance owe. However, the 2005 state tax refund counts as income for my 2006 federal, and a 1099-G to remind you of this amount. But this amount has changed as the result of above mistake. I have almost completed my 2006 return now and wanting to file it soon, I THINK the right thing to do is go ahead and put in the amended amount as stated in this 540X so the 2006 gross income is properly adjusted. Will the IRS or State think I made a mistake and reject my return because they have not received my 1040X and 540X yet, and assume that I didn't report the state tax refund amount in the current 1099-G. Thanks in advance!