How to Amend Your Tax Return for Medical Care Deductions in light of the O’Donnabhain v. Commissioner Decision by Edward F. Connelly, CPA

I agree with the Tax Court.  They got it right, mostly! Hi, I’m a licensed CPA in Massachusetts and this article explains how to amend a tax return and what “medical care” deductions may be appropriate in light of the recent Tax Court ruling re: O’Donnabhain v. Commissioner, 134 T.C. No. 4 (Feb. 2, 2010).

Revising your tax return is done by filing an amended tax return (1040X).  Amended tax returns have to be filed on paper, and they can take 60 to 180 days for the IRS to process. So, be patient.

Do Amended Returns Trigger an Audit?

There has been discussion among various tax professionals whether an amended tax return will trigger an IRS audit. So far, there’s no conclusive evidence. Based on my experience and the experience of other tax professionals, the IRS does check amended tax returns more thoroughly than original tax returns. If you explain the reasons why you are correcting your tax return, and if you back this up with proper documentation, the IRS is likely to process your amended return more efficiently and without delay.

The Due Date and Mailing Your Return

You have up to three years to file an amended tax return for a tax return from the original due date of the tax year Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. If you filed your return early (for example, March 1 for a calendar year, your return is considered filed on the due date (April 15). If you had an extension to file until October 15 your return is considered filed on the extended due date (October 15).  So for tax year 2006 which was due April 16, 2007 and you filed it on or before April 16, 2007 your 1040X will need to be filed on or before April 15, 2010.  Failure to meet this deadline will cause your return to be rejected and you will not get a refund if you are due one. Under special circumstances the IRS can allow an extension, but don’t count on it.

What Happens When You File an Amended Return?

In the past the IRS checked to make sure your explanations were sufficient. They checked to see that you had sufficiently documented the changes in your tax return and they reviewed the information included.  When the IRS received a 1040X they would process it like a desk or correspondence audit. (This is not a real audit but it’s similar to one) A trained IRS Agent would review your return to see if it met the criteria to allow the submitted change(s) to your tax return.  The IRS always appeared to check Amended (1040X) returns more carefully than regularly filed returns (1040). In the past, if the IRS needed additional information or documentation, they would have written you a letter and asked for additional and specific information or documentation.  Under the new revised rules and instructions (Form 1040X and the instructions were revised January, 2010) it is unclear how this process has changed.  However, I believe with the new and heightened IRS review processes being put in place certain types of deductions on returns will be flagged more often for additional information than others.  I recommend sending in more rather than less documentation just so the refund will not be delayed by an IRS request for additional information or documentation. If you owe additional tax, you should mail in a check to pay the tax in full. If you are due an additional refund, expect your refund to arrive in approximately 60 to 180 days.

Adequate or Proper Documentation

This is subjective.  I recommend (in most cases but not all) that you attach (include) all costs paid summarized by category and include invoices (not necessarily all, you can leave out the small ones) as well as canceled checks, (front and back) and any credit card statements where you charged medical care costs.  An itemized detail list of small expenses is not necessary but may make sense to include depending on the facts and circumstances involved.

Preparing your Amended 1040X

The first thing to do is gather all the information that you need. You need your old return and any new information that documents the reason(s) for the need to file an amended tax return.  If you don’t have a copy of your old return, you can request one from the IRS.

How to Prepare an Amended Return

Amending your tax return is a two-part process. Part one: fill out a new Form 1040. Part two: report the differences between your original tax return and your new tax return on Form 1040X.

Part One: Preparing a new 1040. Even if you filed your original tax return using 1040EZ or 1040A forms, you will need to fill out a full 1040 for the amended return, because you will need to calculate your new Form 1040 for the various lines on Form 1040X.

Part Two: Preparing Form 1040X. Follow the instructions for 1040X mostly once you prepare your new 1040 you copy numbers from line items over to the new form 1040X.

Referencing this Tax Court Case is not necessary. Making a statement such as this is all I recommend:

“This return is being filed to include medical care costs not previously taken on my(our) original return pursuant to, but not limited to, IRC Sec 213(d)(1)(A)”
IRC Sec. 213. Medical, dental, etc., expenses

(d)Definitions

For purposes of this section–

(1)The term “medical care” means amounts paid–

(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

Assembling Your Return

IRS instructions state, “assemble any schedules and forms behind Form 1040X in order of the “Attachment Sequence No.” shown in the upper right corner of the schedule or form. If you have supporting statements, arrange them in the same order as the schedules or forms they support and attach them last. Do not attach correspondence or other items unless required to do so.” The IRS is silent regarding what correspondence or other items are required to be included when filing an amended tax return (1040X). Generally the threshold for sending documentation is higher than when filing an amended tax return (1040X).  When filing an original tax return (1040) none of the attached documentation is required as well as no reference to allowable medical care costs pursuant to IRC sec 213 is stated.

Sign and date the amended return. Mail the 1040X to the Service Center where you sent your tax return. I recommend mailing the 1040X two weeks in advance and send the return to the IRS using USPS certified return receipt and also to check online to see that the amended tax return (1040X) reached the IRS before the due date.

If you were living in Massachusetts the address is:

Department of the Treasury
Internal Revenue Service
Kansas City, MO 64999

Consult with a Tax Professional

I recommend that you consult with a tax advisor to determine which costs qualify as “medical care” costs. Cosmetic surgery and costs pursuant to IRC Sec 213(d)(9)(B) are not allowable “medical care” costs. I believe with proper and adequate documentation most or all the costs associated with transition are allowable pursuant to IRC Sec 213(d)(1)(A). (see below)

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CIRCULAR 230 NOTICE: IRS regulations require me to advise you that, unless otherwise specifically noted, any  tax advice in this communication (including any attachments, enclosures, or other accompanying materials) is not intended to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code or applicable state or local law provisions.

Edward F. Connelly is a licensed CPA in Massachusetts and can be reached at 781-449-8700, or by email Ed@128CPA.com

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