Amending very old returns to pay more tax ......

[LCP]

.... in order to be eligible for a larger credit in a more current year.

Here's the story. New client comes in with multiple problems caused in large part by the prior tax preparer. One is that his 2010 first time home buyer credit was disallowed. That is because the IRS noticed mortgage interest on earlier returns. It appears that he wasn't on the earlier mortgage or title and shouldn't have deducted mortgage interest. He did pay it so it was more of a misunderstanding.

He claims that the IRS verbally told him to amend all of those earlier returns 2007 thru 2009 and then they would allow the FTHB credit. Do you buy that?

[appelman]

Should be ok.

As long as he's not asking for refunds, he can amend returns for closed years. The IRS then SHOULD allow the credit, but "should" is the operational word.

[New York Enrolled Agent]

.... in order to be eligible for a larger credit in a more current year.

Here's the story. New client comes in with multiple problems caused in large part by the prior tax preparer. One is that his 2010 first time home buyer credit was disallowed. That is because the IRS noticed mortgage interest on earlier returns. It appears that he wasn't on the earlier mortgage or title and shouldn't have deducted mortgage interest. He did pay it so it was more of a misunderstanding.

He claims that the IRS verbally told him to amend all of those earlier returns 2007 thru 2009 and then they would allow the FTHB credit. Do you buy that?

Probably not.

The years you cite are now out of statute for assessment. Therefore, unless there are some extenuating circumstances you have not posted, any payments of tax submitted with the amended returns will be sent back to the taxpayer as an "overpayment".

IRC §6401(a) states:
(a) Assessment and collection after limitation period

The term "overpayment" includes that part of the amount of the payment of any internal revenue tax which is assessed or collected after the expiration of the period of limitation properly applicable thereto.

[appelman]

Are you sure?

It doesn't seem like the IRS to decline a payment. Anyhow, there's not much to lose by trying.

[New York Enrolled Agent]

It doesn't seem like the IRS to decline a payment. Anyhow, there's not much to lose by trying.

Appelman writes: Are you sure?

No - I just made up the code section to create controversy. It's not a question of the IRS declining a payment - The IRS may not be allowed to accept a payment.

A snip from 119 TC 140

Any amounts assessed, paid, or collected after the expiration of the period of limitations are overpayments. Sec. 6401(a); [numerous cites omitted]... Accordingly, if the period of limitations expired before either formal assessment by respondent or payment by petitioners, then petitioners are not liable for any tax on the cancellation of indebtedness income. [cites omitted] ("any payment by a taxpayer of a barred tax liability, whether voluntary or involuntary, automatically becomes an 'overpayment' and hence subject to mandatory refund [under section 6402(a)]").

[Kram BergGold]

A Possible Problem

There have been cases in which a person was allowed to deduct mortgage interest when they paid it even though they were not obligated. The one that comes to mind is two brothers. Brother 1 wanted to buy a house but had lousy credit. So brother 2 bought the house with a mortgage in his name and brother 1 moved in and made all mortgage payments. The court allowed brohter 1 to dedcut the mortgage. Does your case resemble this.
The other possibilty is your client is a sleezeball and was cheating in 2007-2009 and then tried to
change his method of cheating.
This might be a good one to walk away from.

[S T]

As Kram stated, be a little careful - as the "devil is in the details" on the FTHBC- I had a few that inquired, and were not eligible once the facts and details were gathered and reviewed.

I also know of one or two that "are no longer my clients" have filed Amended Returns, for the very large amount of $ 8,000 Credit Refundable - not sure where that ended up - but I was not signing my name to the Amended Returns. Details were very "suspect" - and I declined.

Sandy

[appelman]

OK, so they'll send back the payment.

Appelman writes: Are you sure?

No - I just made up the code section to create controversy. It's not a question of the IRS declining a payment - The IRS may not be allowed to accept a payment.

A snip from 119 TC 140

Any amounts assessed, paid, or collected after the expiration of the period of limitations are overpayments. Sec. 6401(a); [numerous cites omitted]... Accordingly, if the period of limitations expired before either formal assessment by respondent or payment by petitioners, then petitioners are not liable for any tax on the cancellation of indebtedness income. [cites omitted] ("any payment by a taxpayer of a barred tax liability, whether voluntary or involuntary, automatically becomes an 'overpayment' and hence subject to mandatory refund [under section 6402(a)]").

Even if we grant that the payment will be refunded, is there anything that says the requested change won't stand?

[LCP]

It doesn't seem like the IRS to decline a payment. Anyhow, there's not much to lose by trying.

The "lose" I imagined was that the IRS would cash the checks but then reject the FTHB credit.

More to the story ...... it involved a "domestic partnership" situation in which the owner fell on hard times and could not pay the mortgage. My client lived with him and made all of the payments.

Maybe his deductions were allowable after all......... and, I haven't yet dug back into the details of the FTHB credit to determine whether he might not qualify after all.

Thanks for the input all !

[JohnH]

The real "lose" in this situation is for you to get mixed up in it.
Best to pass on this one.

[FEDUKE404]

Concur

The real "lose" in this situation is for you to get mixed up in it.
Best to pass on this one.

Agreed....this would have been a good client to have "lossed"

FE

[Gary2]

It sounds like the client was acting with a naive but not unscrupulous view of the way things worked. You might explain the issues and risks to the client and judge the reaction. If the client says "OK, I understand, let's forget it", then there would be no reason not to keep the client while dropping the FTHB issue.

On the other hand, the only problem with proceeding as the client suggested is that it may take more of your time than you can charge. It doesn't sound like this is a case of beneficial or equitable ownership, but you'd need to invest some due diligence in determining that. This could be easy if the state doesn't recognize equitable ownership, or it could require getting an attorney's opinion. If you can determine with confidence that there is no equitable ownership, then the client may well be entitled to the FTHB Credit. As far as I know, erroneously claiming the mortgage interest deduction on prior tax returns is not a disqualification for the FTHBC. Those prior years may still be open under the six year rule for substantial understatements, so there may be tax due regardless; we don't have enough info to know. The problem is that you might need to take it to appeals, or advise the client that there's a good chance that the only way to collect is take it to tax court, which wouldn't be cost effective unless they do it pro se.

But as long as you cover the beneficial/equitable ownership issue, I don't see any ethical questions.

[Bees Knees]

We solved this issue in an earlier thread:

http://forum.thetaxbook.com/showthread.php?22083-Amend-07-return-to-remove-HOPE-credit-so-I-can-take-this-year/page3&highlight=amended+bees+knees

Bottom line is you cannot amend a closed year return to pay more tax in order to receive a tax benefit in a future year that is not yet closed. As pointed out by NYEA, the code would treat the payment as an overpayment of tax. Even if the IRS fails to return the overpayment, it is still treated as an overpayment meaning there can be no future tax benefit gained as a result of paying the overpayment.

[JohnH]

Isn't this the basic reason for a Statute of Limitations in the first place?
It essentially provides a date past which the decks are cleared and gives both the taxpayer and the IRS a clean cutoff for all but the most serious of errors/misstatements/etc.

[New York Enrolled Agent]

Those prior years may still be open under the six year rule for substantial understatements, so there may be tax due regardless; we don't have enough info to know. The problem is that you might need to take it to appeals, or advise the client that there's a good chance that the only way to collect is take it to tax court, which wouldn't be cost effective unless they do it pro se.

To suggest the six-year statute is in play here is a stretch. There is not one scintilla of evidence in the original post to indicate a substantial omission of gross income. The poster writes nothing to suggest anything other than closed years. The only way the years would still be open if there was fraud involved. I don't think the original poster wants to go there.

It does not appear Tax Court is an avenue for this taxpayer. To go to TC, the taxpayer needs an "admission ticket". The ticket generally comes in the form of a notice of deficiency. If the year is closed there will be no deficiency.