Q Dear Rick:
I have a tax problem that I hope you can help me with. Since my divorce three years ago I have had a friend do my tax returns. My taxes are relatively straightforward as all I have is income from my employer and some interest. I have no deductions. The only other thing I have is distributions from my ex-husband. That is where the issue comes in. My friend told me the money I’ve received from my ex is taxable. My friend moved out of town, so this year I decided to do my taxes on my own. I took advantage of the free file program you talked about a couple weeks ago. It was very easy and straightforward. The issue came up with the money I received from my ex-husband. When I went through the questions it turns out that I did not have to pay tax on the money from my ex. I called my divorce attorney and he confirmed that the money I received was not alimony but was considered a property settlement and thus, I did not have to pay taxes. I asked my friend who did my tax returns about this and she said she didn’t know there was a difference. I have also talked to my ex, who I have a good relationship with, and he confirmed that I shouldn’t have paid taxes on the money. My question to you is should I file an amended return? The money would be significant to me but I’m afraid to file an amended return because I was told that it can cause all sorts of problems with the IRS. My question to you is what should I do?
Fran
A Dear Fran:
Without question or reservation I would tell you that you should file an amended return. It is one of those urban legends that people think if you file an amended return it’s automatically going to cause you problems with the IRS; that is just not the case. Particularly, in your situation where it would be relatively easy to document that the money you received was not alimony but rather, a property settlement, there is no reason whatsoever not to file the amended return.
To file an amended return you need to complete Form 1040X. You are allowed to amend your return within three years of when you filed your return. Therefore, if you filed your 2012 tax return on April 15, 2013, you would have until April 15, 2016 to amend that return.
I’ve always been a believer that when it comes to taxes you don’t want to play games. Therefore, when you do your 2015 tax return, if you find that you made a mistake in the past, it is your obligation as a taxpayer to file an amended return. Not just because you’re entitled to money but in addition, if you made a mistake on your return and the result is that you owe money to the IRS, once again, it’s in your best interest to file an amended return. Yes, when you owe money to the IRS you will have to pay interest and there is a potential penalty. However, when you voluntarily amend your return it is much easier to deal with the IRS than if you wait until they notify you.
In filing amended returns you also need to look at how the changes will impact your Michigan return. In many situations such as your situation, the changes in your federal return will have an impact on your state return. In the case at hand, it appears that by filing an amended Michigan return you’ll also receive a refund.
It is certainly nice when a friend helps you do your tax return. However, it is always important to recognize that taxes are not stagnant. The rules last year are not going to be the rules next year; tax laws are constantly changing. That is why it is important when you have someone do your tax return to ensure it is someone that understands taxes and is dedicated to staying current. Unfortunately, many people who prepare taxes don’t stay current and that is where problems develop. Remember, ultimately you and I sign our tax returns and thus, we are the ones who are ultimately responsible. That is why it is important to make sure if someone does your tax return, they know what they’re doing.
One last note, don’t forget many of you are eligible to take advantage of the IRS’ free file system. It is a very good system and it allows you to access software from various companies such as TurboTax, TaxSlayer and other well-known tax software programs for free. It’s not gimmicky and it saves you money. As I’ve always believed, the money you save always looks better in your pocket that it does anywhere else.
Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com