Amending >3yr old return (2016) for income and deductions; will IRS accept the deductions?

[JFM2]

Hi all

I am amending my 2016 return. The primary reason is that I failed to report a Traditional --> Roth "backdoor" conversion that had a taxable component (I've already worked it out on 2016 8606). It's clear to me that the IRS wants me to amend to revise up my taxable income and tax due.

However in that year I also had a very large amount of healthcare expenses, large enough to warrant an itemized deduction. Unfortunately I / my accountant back then failed to realize this.

Given it's been more than 3yrs since the original filing, do you think the IRS will accept the revised deduction along with the upward revision to my income? Or will they disallow the revision to deductions?

Thanks!

[MaryK4]

Unfortunately, you cannot make a "claim for refund" three years after the original return was due or filed.  This means you would not be able to add the deductions to reduce the additional tax you have due.

[JFM2]

Thanks so much @MaryK4 .

So would you suggest my best option is to simply leave the previously-unreported deductions out of the amendment, and only include the revision to income? 

As in, it's not worth the trouble of including the deductions, because they'll just be disallowed and it will force more back-and-forth with the IRS to finally get it all correct?

[JohnB5677]

No, let me clarify this.

An amendment to a 2016 tax return for a refund would have had to be completed by October 15th 2020.  So, if you don't have any change to carryover losses it is not worth filing anything at all.

If you do have a small amount of additional tax owed in 2016 (that was not due to fraud). The statute of limitation has run out, and the IRS will not be seeking to collect it.

IRS guidelines state:

Generally, the statute of limitations for the IRS to assess taxes on a taxpayer expires three (3) years from the due date of the return or the date on which it was filed, whichever is later. A return is considered to be filed on the due date of the return if it was filed on or before its due date.

An assessment occurs when an IRS officer signs a certificate of assessment stating the amount owed by the taxpayer.

Additionally, the IRS statute of limitations gets extended for an even longer time when there is a substantial omission (more than 25 percent) of gross income on the return. 

In these circumstances, the time limit for the IRS to make its assessment gets stretched out to six (6) years from the date the return is filed or deemed filed, whichever is later.

[JFM2]

Thanks very much @JohnB5677 - I appreciate the information regarding the statute of limitations.

However there is a complicating issue, at least potentially:

-I made a non-deductible contribution to my Traditional IRA for ty 2016, in addition to doing a Traditional-to-Roth conversion

-I therefore need to file the 8606 for 2016 (which I failed to do at the appropriate time), to notify the IRS of the contribution, so that my basis is properly tracked

-Since I'm filing & signing the 8606, I feel I have to also state that I did the Traditional-to-Roth conversion, and that it had a taxable component (not to mention, the conversion itself impacts my going-forward basis in the Traditional IRA)

In light of all that I see a few potential options; I would appreciate your views on which is best!

1) File the 8606 on its own (signed) w/ $50 late filing penalty

2) File the 8606 with an amendment to my 2016 return, using 1040-X, with additional tax payments related to the taxable component of the conversion

3) Don't file the 8606 and follow some other procedure to keep the IRS informed of my basis in the Traditional IRA

Thank you again!

[AmyC · Accepted solution]

Option 2. Here's more information to help you.

Every brokerage sends the IRS the 5498 forms each year along with the balance of each of your brokerage accounts, broken down by type and account number. The IRS is aware of what you have. 

The IRS usually runs about 3 years behind but is further behind right now. They will notice.

The IRS expects you to file returns up to 10 years back correcting and paying. The last 3 years are only for refunds.

You can absolutely add in your health care expenses and any other deductions you missed. You may not get a refund, but not owing is the next best thing.

Even if you owe, a little now with a smaller penalty and interest beats waiting.

[fanfare]

8606 by itself won't help you because it won't calculate your new tax due.

You should submit the complete correct tax return with deductions.

The worst that can happen is IRS will disallow the additional deductions.