TAX INSIDER

Quirks spurred by COVID-19 tax relief

Find out the difference between amended and superseded returns.
By Sarah Shannonhouse, CPA

It's May, and we've had a few weeks to digest all the new tax legislative, regulatory, and procedural guidance that's been released associated with COVID-19. That means we've also had a little time to ponder some procedural and administrative quirks that have emerged.

Here are some head scratchers that could keep you from watching too much TV.

Superseded returns used to avoid accuracy-related penalties

Even though the IRS announced extensive filing and payment relief in Notice 2020-23 for deadlines occurring between April 1 and July 15, your clients might have pushed to file their returns early. This could be the case if clients needed to obtain their refunds quickly or perhaps because their economic impact payments were higher based on their 2019 tax returns than their 2018 tax returns. This difference could occur, for example, because clients retired or lost their jobs in 2019 (which might lower adjusted gross income below the phaseout) or had a baby (which would qualify for the $500 additional payment).  

July 15 is still a few months away. But what if you discover an error or omission on a return already filed with the IRS that needs to be corrected? It's still before the due date. The advantage of fixing the return now, before the due date, is that the possibility of accuracy-related penalties associated with the incorrect information could be eliminated.

As a quick recap:

  • An amended return is one filed after an original return and after the due date (including extensions).
  • A superseding return is one filed after an original return but before the due date (including extensions).

Amended returns essentially exist along with the original return. Superseding returns, on the other hand, replace an originally filed return.

How to file a superseding return is one issue. Some returns have a specific box to check, others require the use of separate amended return forms (such as the Form 1040, U.S. Individual Income Tax Return, which requires a Form 1040-X, Amended U.S. Individual Income Tax Return).

Another important part is whether a taxpayer must paper-file a superseded return (which may be challenging when the IRS has scaled back operations during the COVID-19 pandemic), or whether the taxpayer can e-file it. According to paragraph 1.6.10 of Publication 4164, Modernized e-File (MeF) Guide for Software Developers and Transmitters, amended Form 1040 returns cannot be electronically filed. On the other hand, amended returns can be electronically filed for subsequent Forms 990, Return of Organization Exempt From Income Tax, 990-EZ, Short Form Return of Organization Exempt From Income Tax, 990-PF, Return of Private Foundation, or 1120-POL, U.S. Income Tax Return of Certain Political Organizations. Further, a superseded return with electronic filing is available for Forms 1041, U.S. Income Tax Returns of Estates and Trusts, 1065, U.S. Return of Partnership Income, 1120, U.S. Corporation Income Tax Return, 1120-F, U.S. Income Tax Return of a Foreign Corporation, and 1120-S, U.S. Income Tax Return for an S Corporation.

So, if you need to file Form 1040-X as a superseding return for your client, you will need to paper-file it so that the superseded return will replace the original, incorrect return and eliminate any potential associated accuracy-related penalties.

The IRS specifically states paper returns will be processed once processing centers are able to reopen.

Does the statute of limitation start April 15 or July 15?

Generally, the statute of limitation for the IRS to assess taxes expires three years from the due date of the return or the date on which it was filed, whichever is later. The time is increased to six years when there is a substantial omission (more than 25%) of gross income on the return.

Now that Notice 2020-23 has pushed the deadline for returns and payments due between April 1 and July 15 to July 15, what is the new starting point for the statute of limitation? Is it April 15 or July 15?

Sec. 6501(b)(1) states, "For purposes of this section, a return of tax imposed by this title, except tax imposed by chapter 3, 4, 21, or 24, filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be considered as filed on such last day."

One could argue the law changed given the passage of legislation such as the Families First Coronavirus Response Act, P.L. 116-127 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136), and the release of Notice 2020-23. However, will these changes rise to the level of "by law or regulations promulgated"? It's not clear yet.

State administrative issues

With so much focus on federal issues, let's not forget about issues at the state level, which can be challenging. The AICPA has identified a list of administrative, filing, and payment relief recommendations for state and local taxpayers in response to the COVID-19 pandemic.

For example, to aid in social-distancing practices, the AICPA recommends states permit electronic fund transfers for payments with no additional fees (instead of paper checks). Further, the AICPA recommends states permit electronic filing and email transmission of documents and returns. States should also suspend any requirement to send items and returns via certified mail.

Another recommendation addresses the issue of whether the presence of an employee working in a state due to shelter-in-place restrictions creates nexus for tax purposes in that state. The AICPA recommends states permit businesses to adhere to work locations for state and local tax purposes during the pandemic and allow businesses the option to use these employees' work locations for payroll withholding, nexus, and apportionment purposes while those telework requirements are in place. The AICPA's comprehensive state tax guidance chart is continuously updated for new state nexus information as it's released.

We're in this together

So, if you're noticing some tax procedural and administrative oddities lately, know you're not alone.

— Sarah Shannonhouse, CPA, is a Manager, Tax Practice & Ethics–Public Accounting for the AICPA. To comment on this article or suggest an idea for another article, contact her at Sarah.Shannonhouse@aicpa-cima.org.    

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