I received the following update from William Perez:

Dear TaxGuru,

My firm prepares several amended returns each and every year, and most of our clients are based in California. So far, we haven't had any audits on our 1040X's (thank goodness), but your warning has caused me to re-think whether it still makes sense to file amended returns. The only (anecdotal) evidence I can provide is that earlier this year, one of our tax preparers was sending in 1040X's with explanations like "Amending return to correct the information on the 1040." Or something vague like that. Several of these returns were returned as unprocessable. The IRS wanted a more detailed description of the changes. It has been my habit to provide a thorough narrative of the revisions, such as which credits we are now claiming, or responses to any examinations or assessments, and referring to the specific AUR control number or other identifying number so the IRS can process the amendment correctly. I have a gut feeling (no feedback from the IRS) that this practice makes it easier for the processing center to figure out what to do, and whether there's an audit risk or not. Saying on the amendment: "Taxpayer was eligible to claim the Lifetime Learning Credit for the year 2001, but didn't know she could do that." Makes a lot more sense than an amendment with little or no explanation but with a change in the tax credits column.

As always, I try to prepare my returns with the auditor in mind. I ask myself: if I picked up this return and started looking at it, how fast would it take me to put it down and move on to the next return? In my example of the education credit, the auditor will either think to himself, ok this makes sense, or will do a quick search for a 1098-T document in the payer documents to find a match, and then either close the case, or dig deeper if something's amiss. Am I thinking too logically here? I do realize that the IRS may be embarrassed over the amended return scams, but if you tell the IRS what's going on and why you're claiming a refund, I think that may go a long way to creating a smoother process.

Until I hear more about what's going on around the country (from your blog), I will approach amended returns with much more caution.

Very sincerely yours,
 
William Perez
Your About.com Guide to Tax Planning
http://taxes.about.com/
taxes.guide@about.com

My Reply:

William:

Thank you very much for the feedback from the Left Coast.

Let me add some more descriptions of my experiences with amended returns so you can see that it's not just vaguely described changes that are triggering these new audits.

It has always been my policy to attach a ton of detailed explanations to every 1040X, including almost an entire copy of the revised 1040, except for schedules that had not changed at all.  When there are several changes, I also attach an Excel spreadsheet listing each one in the same three column format as Page 1 of the 1040X.  For decades, the 1040Xs have been processed by IRS with no problem.  The only ones they wanted to review more backup documentation had been ones where the refunds being claimed were very large, as in $100,000 or more.  Even in those reviews, the auditors only looked at the items being changed.  After their reviews, they accepted the 1040Xs as I had prepared them and the clients received their refunds, along with quite a bit of interest.

This new policy by Arkansas IRS employees of auditing all 1040X refund claims has caught up two of my clients and has already taken a lot of our time.  Those returns that I prepared had all of the additional documentation that I had always been including.  The IRS personnel with whom I spoke were very explicit that their review of 1040Xs is in no way limited to the items that were changed and they will examine everything in order to try to find some mistakes in the other direction that will offset the refund claims and even hopefully make some more money for the government. 

This is a classic "fishing expedition" tactic that has already cost my clients thousands of dollars in my fees, and we're still not finished because of all the tangential issues that the auditors wanted to explore.  I have a feeling that this may be a strategy by IRS to wear us down and have us just drop our refund claims.  It has drastically altered the economics of when it's practical to file amended tax returns for clients and has already caused me to back off from preparing a number of them that would have been easily justifiable before Arkansas IRS employees started their aggressive anti-refund tactics.

In my discussions with IRS agents, I asked point blank if there is anything else we can attach to the 1040X to avoid this kind of extremely invasive examination of even the smallest refund claims.  I was told that attaching extra documentation to the 1040X  couldn't hurt; but probably wouldn't help because they only receive transcripts of the return from the service center.  Because of classic distrust of their own systems, most auditors don't even request the actual tax return from their own people and instead ask for one from the taxpayer or rep. 

For your and your clients' sake, I hope this IRS policy is isolated in certain parts of the country and doesn't hit you all on the Left Coast.  If you do notice such a change, I would appreciate your sharing that with me.

Thanks again for taking the time to write with your experiences on the front lines.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/08/2004 03:29:00 PM Send this post: