As the filing season starts, it is appropriate to think of filing more than one return if the first or second return is incorrect. This is not the same as voting early and often as Chicago voters were fond of doing during the Mayor Daley era. The filing of a more correct return(s) during the filing season allows the taxpayer to get it right before the due date of the return in order to avoid penalties or other consequences that can flow from an incorrect return. With each new return filed prior to the due date of the return, the newly filed return replaces and supersedes the preceding one(s). Because of the timing of this post at the beginning of the filing season, we do not mean to suggest that you make anything but the best effort in filing the first return, but knowledge of the availability of the superseding return may come in handy for one of your clients some day.
Usually, April 15th is not an especially busy time for the tax clinic because the work of the clinic is not geared to the filing season but rather to the litigation calendar. Last year things worked out a little differently because we had some clients with unfiled 2012 returns that generated refunds which would have been lost if the returns were not filed within three years of the original due date and a client who had already filed their 2015 return which was rendered incorrect by a Form 1099 received after the filing of the return. So, the filing date mattered to our clinic last year. In filing the second return for 2015 for the client who received the Form 1099 after the original filing for the year, we filed what is known as a superseding return. Prior to filing this return, we did a bit of research which I share in this post. If we had not filed a superseding return in the case of the Form 1099, the taxpayer could have filed an amended return after the due date for filing the 2015 return passed or could have waited for contact from the IRS Automated Underreporter Unit and responded at that time to an inquiry about the income reported on the Form 1099 but not reported on the Form 1040. By filing the superseding return, we hoped that we corrected the situation in the timeliest manner. Superseding returns are far enough outside filing norms for me to expect that some glitch might occur in doing this so you do not want to do this routinely or declare victory too soon afterwards.
read more...Many people file returns early in the filing season because they want to obtain a refund as quickly as possible or they need to have a filed return for other reasons such as sending it to the people who determine the amount of student loans or financial aid for which their son or daughter qualifies. Sometimes, after filing a return and before the due date for filing the return, a taxpayer gains additional information that renders the return incorrect in some fashion. The taxpayer in that situation faces a choice about whether and when to fix the return. The advantage of fixing the return prior to the due date for filing the return is that fixing it before that date makes the later return the original return for the tax period and eliminates the possibility of penalties or other action based on the missing information.
If a taxpayer learns of the incorrectness of a return after filing but before the due date, they also face a slightly different situation than if they had learned about the incorrectness after the due date. The regulations provide that a taxpayer should, but not must, file an amended return when they learn that a return filed is incorrect. I co-authored an article with Professor Calvin Johnson on the duty to correct returns if you want to read more on this topic. The regulation which directs taxpayers that they should file an amended return when learning of a mistake seems to address the taxpayer who finds out after the original due date. If the taxpayer finds the mistake before the original due date and fails to fix it before that date, their responsibility to the system may differ.
The idea of superseding returns receives little attention. The IRS makes brief mention of it in I.R.M 21.6.7.4.10 which it last revised on October 1, 2016. The mention in the manual does not imply that the IRS encourages superseding returns. I suspect that the IRS does not want to encourage superseding returns because it does not want to deal with the processing headaches they will create. If you do submit a superseding return, you will need to file the return as a paper return and you will want to write on the return “SUPERSEDING RETURN” at the top of the form in hopes that doing so will give a big clue to the person processing the return. Of course, you could send it with a cover letter but letters often get separated from the tax form during the filing process.
The legal basis for superseding returns traces its roots to Haggar Co. v. Helvering, 308 U.S. 389 (1940). In Haggar the taxpayer filed a return, realized before the due date that the return contained a mistake, filed an amended return before the due date of the original return and sought to have the IRS accept the amended return. The return had particular importance in this year because it fixed the corporation’s capital stock account for purposes of a special tax on earnings. The Court stated “Sections 215 and 216 of the National Industrial Recovery Act impose interrelated taxes on domestic corporations — namely an annual capital stock tax and an annual tax on profits in excess of 12 1/2 percent of the capital stock, calculated on the basis of the value of the capital stock as fixed by the corporation’s return for the first year in which the tax is imposed.” The return at issue in Haggar was the corporation’s return for the first year.
The IRS refused to accept the second or amended return and issued a notice of deficiency based upon the value of the stock in the tax return originally filed The taxpayer petitioned the notice arguing that filing the amended return before the due date allowed it to set the value of the stock. The Supreme Court agreed stating:
“It is plain that none of these purposes would have been thwarted, and no interest of the Government would have been harmed, had the Commissioner, in conformity to established departmental practice, accepted the petitioner’s amended declaration. It is equally plain that, by its rejection, petitioner has been denied an opportunity to make a declaration of capital stock value which it was the obvious purpose of the statute to give, and that denial is for no other reason than that the declaration appeared in an amended, instead of an unamended, return. We think that the words of the statute, fairly read in the light of the purpose, disclosed by its own terms, require no such harsh and incongruous result.”
Even though most returns do not have the same importance as the return at issue in Haggar, the principle in the case established the concept of superseding returns that carries forward to today. While my description of superseding returns focuses on using them to correct a mistake found before the due date in order to avoid penalties or some other consequence of leaving information off of a return, a couple of former Chief Counsel attorneys, Harve Lewis and Norlyn Miller, have written about how it might be used as a planning tool for timely making certain corporate elections.
Interesting post Steve. Thank you. I can see how filing a “SUPERSEDING RETURN” can be beneficial in certain instances as a planning tool. However as a practitioner down in the trenches I fear any form of paper communication with the IRS, particularly that the data on the submitted forms will not be properly input or worse still the forms themselves get ‘lost’ inside the IRS and never posted. This translates into more time spent tracking and following up. With MeF fully functional, systematic mismatches involving corrected 1099’s (as in your example) are for the most part timely addressed by the IRS with an adjustment to the taxpayer’s account account and a correspondence letter. Would you agree?
I am not sure where it is located in the IRM but I have found reference to the following: If you file an extension, the due date to file a superseding return continues to October 15.
Note that superseding returns can be used to reverse supposedly irreversible elections such as changing married filing joint filing status to married filing separate. (I do not for one second state that the IRS is going to make this process easy! But I have seen it done.)
Also, the IRS machinery just doesn’t understand “superseding returns” and will typically process them as a “duplicate” or “amended” return. I have typically gotten a letter from the IRS asking “Which return do you want to process?” despite the fact that “SUPERSEDING RETURN” was written plainly across the second return in bold language.
This is what the IR Manual says:
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An amended (Form 1040X) or corrected (duplicate) return filed on or before the due date or the extended due date is a superseding return.
A. Correspondence postmarked on or before the due date or extended due date, requesting changes to tax returns, is processed as superseding information.
Consider the following when making a superseding adjustment:
Changes in irrevocable elections (i.e., Section 179, Joint to Separate)
Note:
A return filed after the original due date but on or before the extended due date does not constitute a superseding return in this situation.
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I’m not sure I agree with that but it really doesn’t matter because who at IRS reads the Manual, anyway? And as Judge Ashford pointed out last week (in the Elaine case), “as we have previously held, the provision in the IRM on repetitive examinations (or any IRM provision for that matter) is discretionary rather than mandatory, creating no legally enforceable rights for taxpayers.”
I have employed this option on several occasions over the years. Never received any kick-back from the IRS. Nice to know about the 10/15 date for extensions. I am also under the impression that the superseded return must be in IRS hands by the 15th.
I used this rule (before it was called a superseding return) to allow a client to make a critical election that was overlooked in its original return. I think the election had to be made on a timely filed return without regard to extensions. It’s too many years for me to remember which election. Thanks for the update!
Only “speaking” to get any further comments. However this is valuable info for an erroneous return filed prior to that “info” that the TP “forgot” to include or that “info” that the TP “forgot” that he/she purchased, etc. Saves going the amended route with the additional scrutiny/questions.