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Old-fashioned amended return filings could cost IRS billions

The Internal Revenue Service has been encouraging, and in some cases forcing, taxpayers to use electronic options for years.

But one area that's slipped through the electronic cracks is amended tax filings.

And the IRS' continued old-fashioned handling of 1040X forms could cost Uncle Sam billions of dollars.

IRS Form 1040X amended federal tax return filing

Taxpayers can amend their previous filings, generally within three years of the original due date, to correct errors or claim overlooked tax breaks. 1040X filings typically are done to collect larger IRS refunds.

In fiscal year 2012, the IRS received more than four million amended tax returns. A review by the Treasury Inspector General for Tax Administration (TIGTA) of a statistical sample of amended tax returns for that year found that 17 percent of them resulted in potentially erroneous refunds.

The sample's error amount was $103,270. Extrapolating from that sample, TIGTA estimates that the IRS may have issued more than $439 million in potentially erroneous tax refunds claimed on 187,421 amended tax returns during fiscal year 2012.

Taking its numbers further, says TIGTA, the IRS could issue more than $2.1 billion in potentially erroneous tax refunds claimed on amended tax returns over the next five years.

Problematic process, suggested solutions: TIGTA initiated its amended returns audit because the IRS watchdog had previously identified problems with the processes the agency uses to verify claims on amended tax returns.

"The IRS' current process for filing and processing amended income tax returns creates unnecessary burden on taxpayers and increases the potential for erroneous tax refund payments," said J. Russell George, Treasury Inspector General for Tax Administration.

TIGTA has a couple of suggestions it says could reduce erroneous refunds, IRS processing costs and taxpayer burden.

First, Form 1040 should be revised to let taxpayers make corrections to their original filings. TIGTA estimates that allowing taxpayers to amend their tax return by e-filing a modified Form 1040 could have potentially saved more than $17 million in processing costs during Fiscal Year 2012.

Second, the IRS should accept e-filed 1040X forms.

Taking a cue from state tax departments: Eighteen of the 43 states that require individual tax filing allow their taxpayers to amend state filings using the same tax form they used to file their original tax return, according to the TIGTA report.

Those states, said TIGTA, also allow for amended return e-filing.

The report included an example of how Utah taxpayers file amended returns.

Utah tax return form-original and amended filings-excerpt
Form TC-40, Utah Individual Income Tax Return. Note the instruction at top to enter a code if the form is submitted as an amended filing.

The IRS isn't sold on revising the 1040, but in its response to the report said that it plans to consider changing the format and appearance of Form 1040X.

And it also said it will look into electronically filed amended tax returns as soon as it has enough funding and resources to implement the computer programming changes and testing that would be necessary to do so.

If that's the hold-up, then based on Congressional reluctance to increase the IRS budget means that taxpayers shouldn't plan on e-filing Form 1040X any time soon.

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I think government should not be afraid to adopt or even try other options to minimize the expenses due to the old fashioned amended return filing.

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