Correcting Previous Tax Filings
by Ronda Pitts, CPA
Businesses are responsible for filing many forms and returns with the federal government as well as their respective state and local authorities. What do you do when you discover that a return you previously filed was incorrect? First of all, don't panic. Correcting these returns is not as difficult as you may think. This article will discuss how to correct some of the more commonly filed federal returns such as payroll returns (Forms 944, 941, 940, W-2 and W-3), information returns (Forms 1098, 1099, 5498 and W-2G) and business returns (Forms 1040-schedule C, 1120, 1120S and 1065).
Any business that has employees files an Employer's Quarterly Federal Tax Return (Form 941) or an Employer's Annual Employment Tax Return (Form 944). These returns report the total compensation paid to employees for the quarter or year, the amount of federal income taxes withheld and calculates the Social Security and Medicare taxes due. If it is discovered that a reporting error was made on a return that was previously filed, a correction should be made by completing a Supporting Statement to Correct Information (Form 941c).
Form 941c is not an amended return and must never be filed separately. Form 941c provides the background information required to support prior period adjustments to income, Social Security taxes and Medicare taxes reported on a variety of forms. The adjustments documented on the 941c are calculated and reported on the Form 941 or Form 944 in the quarter or year in which the error was discovered. If the adjustment results in an overpayment and the taxpayer chooses to receive a refund instead of reducing current employment taxes, the Form 941c should be attached to a Claim for Refund and Request for Abatement (Form 843).
Most businesses that file a Form 941 or 944 are also required to file an Employer's Annual Federal Unemployment (FUTA) Tax Return (Form 940). Most employers pay both state and federal unemployment taxes; however, this discussion will only cover the federal return. Although FUTA tax liabilities may be payable on a quarterly basis, Form 940 covers an entire calendar year. To correct errors on a previously filed Form 940, simply complete another Form 940 with the correct information and check the "Amended Return" box in Part 1. Attach an explanation of the reasons for the amended return.
Wage and Tax Statement (Forms W-2 and W-3)
Annually, employers report employees' wage, tax and other various information to the Social Security Administration (SSA), state authorities (if applicable) and to their employees by completing the Wage and Tax Statement (Form W-2). A Transmittal of Wage and Tax Statements (Form W-3) is used to summarize the Form W-2 information and submitted with the W-2s to the SSA. Errors on these forms should be reported as soon as possible after they are discovered.
A Corrected Wage and Tax Statement (Form W-2c) should be used to correct an error on a previously filed Form W-2. The W-2c reflects the information as previously reported, the correct information and the dollar amount of increase or decrease in wages and taxes withheld. Only income and tax withholding items which need to be changed should be reported on Form W-2c. It is important to note that if any item shows a dollar change and one of the amounts is zero, a "0" should be entered in the appropriate box instead of leaving the box blank. Copies of the W-2c should be sent to the employee affected by the change to state authorities (if applicable) and to the SSA. A Transmittal of Corrected Wage and Tax Statements (Form W-3c) should be completed and accompany the W-2cs being sent to the SSA. The Form W-3c summarizes the information on the W-2cs.
If the only change needed is to correct the employee's name and/or Social Security number, only the top portion of the W-2c (a-l) should be completed. Do not complete the "Changes" section of the W-2c and do not submit a W-3c with the W-2c. A W-2c should not be filed with the Social Security Administration to merely correct the address if all other information on the original W-2 is correct. However, if the address was incorrect on the Form W-2 furnished to the employee, the employer must either: issue a new W-2 to the employee with all information correct indicating "reissued statement;" issue a W-2c to the employee; or reissue the original W-2 in an envelope showing the correct address.
Information Returns (Forms 1098, 1099, 5498 and W-2G)
There are many information returns that a business may need to submit, but the most common is used to report miscellaneous income (Form 1099-MISC). At first glance, it would appear that correcting these forms would be easy because there is a "corrected" box right on the form. It is not always that simple; as the means of correction depends on the nature of the error.
If the dollar amounts or address are incorrect and/or a return was filed when one should not have been filed, the correction is a one-step process. Simply prepare a new information return and enter an "X" in the "corrected" box at the top of the form. Enter the payer, recipient and account number information exactly as it appeared on the original incorrect return. Enter all correct money amounts in the correct boxes as they should have appeared on the original return and enter the recipient's correct address. If a return should not have been filed, enter "0" (zero) for all dollar amounts. Submit the corrected returns with an Annual Summary and Transmittal of U.S. Information Returns (Form 1096).
If the recipient's identification number was incorrect or missing when originally filed or the recipient's name was wrong, correcting these errors is a two-step process. First, prepare a new information return with the payer, recipient and account number information exactly as it appeared on the original incorrect return and enter "0" (zero) for all the dollar amounts. Enter an "X" in the "Corrected" box at the top of the form. The second step is to prepare another new information return with all the correct information. DO NOT enter an "X" in the "Corrected" box on this return. Submit both returns to the appropriate service center accompanied by a completed Form 1096. Enter the words "Filed to Correct TIN, Name and/or Address" in the bottom margin of the form.
If the original information return was filed using the wrong type of return, follow the two-step procedure above with one exception. Enter the words "Filed to Correct Document Type" in the bottom margin of the Form 1096.
Income Tax Returns (Forms 1040, 1120, 1120S and 1065)
A sole proprietor reports the net results of business operations on Form 1040, Schedule C. In order to correct previously filed errors, the individual taxpayer would need to complete and file an Amended U.S. Individual Income Tax Return (Form 1040X). This form reports certain totals as originally filed on Form 1040, compares them to the corrected amounts and calculates the net change. In addition to a written explanation, the Form 1040X must be accompanied by a corrected version of any supplemental form that changed as a result of these adjustments.
A corporation files a Form 1120 to report the net results of business operations. To correct previously filed errors, a corporation would file an Amended U.S. Corporation Income Tax Return (Form 1120X). The 1120X compares amounts as previously filed to correct amounts and calculates the amount of change. Corrected forms and schedules should be attached to support the changes made to the original return.
An S Corporation does not typically pay federal income tax as the corporation's income is passed through to the individual shareholders by way of a K-1. If an error is discovered in a previously filed return, a new 1120S would need to be filed with the correct information. Simply place a check in the ?amended return? box. In addition, new K-1's would be issued to each shareholder who was affected. The ?amended K-1? box should also be checked. Each individual shareholder would then need to file a Form 1040X to correct his or her individual income tax return.
A partnership is very similar to an S Corporation in that it does not pay its own federal income taxes and passes its income through to the individual shareholder on a K-1. Correcting a partnership return is handled in the same way as correcting an S Corporation return.
Any error made on a previously filed return can be corrected if discovered before the statute of limitations expires. The statute varies for each return, but the general rule is that a correction must be made within three years of when the original return was filed. The key is to provide the required information by submitting the appropriate forms to the proper authorities. To expedite a resolution; it is advisable to seek the assistance of a certified public accountant to assure that any corrections are handled appropriately.
About the Author
Ronda Pitts, CPA, is a partner with KraftCPAs, PLLC in Nashville, Tenn.
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