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

[LCP]

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.

That's not quite the same scenario though..... in that situation they were trying to undo an election made in a closed year.

In my situation, the deduction was (arguably, perhaps) not allowable in the first place.

My issue is whether an unallowable deduction results in the disallowance of a future FTHBC and if it does, is there anything that can be done to correct it. The answer I'm hearing to the latter question is "No". I'll concentrate on the first question.

Thanks again for all of the comments!

[Bees Knees]

..... in that situation they were trying to undo an election made in a closed year.

In my situation, the deduction was (arguably, perhaps) not allowable in the first place.

The code is clear that amending a return to pay additional tax after the statute of limitations is considered an overpayment. Thus, you can't undo a deduction either.

The only argument you can make is to argue the time limit that applies is longer than 3 years. TTB page 15-4 lists four exceptions to the three-year limitation period. So ask yourself: Do you want to amend to claim your client:
1) filed a fraudulent return?
2) failed to file a return?
3) made an agreement with IRS to extend the statute of limitations?
4) under-reported income by 25% of gross income reported on the return?

Obviously your client filed a return, so number 2 cannot apply.
I doubt your client made an agreement with IRS to extend the limitations period, so number 3 cannot apply.
And we are talking about a deduction that should not have been taken rather than under-reporting gross income, so number 4 cannot apply.

That leaves the fraudulent return option.

[Gary2]

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.

Oops, you're right. I had mentally conflated the rules for the substantial understatement penalty (based on the tax) with the rules for the substantial understatement statute of limitations (based on income). Even then, there aren't that many places where the tax and mortgage interest would result in a $5K tax difference, though my area is one where it could, at least when mortgage rates were higher.

[LCP]

Client needed to obtain copies of prior year returns and just brought them in so I am revisiting this thread.

I'm inclined to advise him that it won't work even though he claims that someone at the IRS told him to do it.

If he's adamant about trying it I'll send all the returns together without any payment on the earliest years and see what happens.

Any further thoughts??

[buzzardbreath]

Yes Another Thought

The issue of filing old amended returns is obscuring the facts.

The initial question was whether the taxpayer had previously owned a house. If he can produce evidence that he had never owned a house, it shouldn't matter that improper deductions were taken in the past.

If in fact he was a FTHB, he should be allowed the credit. If IRS can get away with opening up a new clock on the SOL, then let them proceed to collect understated taxes as a separate issue.