The Secret of the Superseding Tax Return
In the tax world, there rarely is an opportunity for a do-over; however, if a taxpayer files a tax return, and later wants to undo something on that return, the taxpayer can generally file a superseding return to do so.
A taxpayer’s right to file a superseding return is rooted in long-standing Supreme Court precedent. Haggar Co. v. Helvering, 308 U.S. 389 (1940) has “come to stand for the proposition that a superseding return, whether filed on extension or not, is effective for most purposes.” CCA 202026002.
It is important to note that the IRS takes the position that a taxpayer filing a superseding return to make a change in an irrevocable election must file the superseding return prior to the unextended due date. See Internal Revenue Manual §22.214.171.124.10 (10-01-2020).
Therefore, a taxpayer who timely filed a married filing joint tax return can file a superseding return prior to the unextended Form 1040 deadline and change to a married filing separate tax return.
Here are some logistical considerations:
A Form 1040 or Form 1040-X received prior to the deadline is a superseding return.
A taxpayer may have to file a superseding return by mail. If so, the taxpayer should ensure the IRS receives the return well in advance of the deadline with delivery confirmation.
In order to ensure the IRS processes the return as a superseding return, if mailed, the taxpayer should write “SUPERSEDING RETURN - IRM 126.96.36.199.10” on the top of the first page in red.
Due to the American Rescue Plan Act of 2021, many taxpayers who already filed a joint tax return for tax year 2020 may now have a net tax reduction with separate returns:
New §85(c) exempts the first $10,200 in unemployment compensation from tax; however, there is a hard cliff: if the taxpayer’s modified adjusted gross income (MAGI) is $150,000 or more, regardless of filing status, he or she is ineligible for the exclusion.
As discussed previously in this newsletter, married taxpayers over $150,000 adjusted gross income (AGI) may receive significantly larger 2020 and 2021 recovery rebate credits and economic impact payments by filing separately.
For a taxpayer to get an additional economic impact payment for the new 2021 recovery rebate based on the 2020 tax return, the IRS must process the 2020 separate return no later than August 15, 2021 (90 days after the postponed Form 1040 deadline of May 17, 2021). Mail them in as soon as possible!
While this strategy will most benefit taxpayers in non-community property states, it can also help taxpayers in community property states as well, albeit fewer.
2020 Unemployment Exclusion: It’s Complicated
The IRS issued revised Form 1040 instructions due to the new $10,200 unemployment exclusion for tax year 2020.
Beware making a manual adjustment before the official software update:
State conformity to the new exclusion is unresolved in many states. In addition, if the state uses federal AGI, but does not tax unemployment compensation, an adjustment will be required.
The taxpayer has to add back the excluded unemployment amount to MAGI for certain income-sensitive tax provisions, such as Social Security benefit taxation, IRA contribution deductibility, and the $25,000 active participation in real estate allowance.
The IRS requested that taxpayers not amend any prior filed tax returns to take the new unemployment exclusion. Commissioner Rettig indicated the IRS plans to auto-adjust the tax returns, if possible. Of course, a superseding return to qualify a taxpayer is an exception to this rule.
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American Rescue Plan Act of 2021 Webinar
I have a 2 CE webinar on all of the tax provisions of the American Rescue Plan Act of 2021. There are significant tax changes for tax year 2021 that you need to learn now, in addition to two provisions that are retroactive to tax year 2020.
I have one opening for my monthly subscription program for tax professionals who want an ongoing consulting relationship. I also offer 30-minute and 1-hour stand alone consultations. You can see the details and sign-up information on my website.
My Upcoming Education Events
Compass Tax Educators, of which I am a co-owner, is offering its annual all-access pass for all live webinar events from May 1, 2021 through April 30, 2022. We guarantee we will offer at least 30 CE/CPE. You can see the courses planned and purchase a pass here.
Virginia Society of Enrolled Agents Spring Seminar - June 2-4, 2021 (virtual)
Introduction to IRS Representation (2 CE)
Arizona Society of Enrolled Agents Southwest Fest- June 14-16, 2021 (virtual and live)
Advanced Rental Property Tax Issues (4 CE); COVID-19 Hot Topics for 2020 Tax Returns (2 CE); Penalty Abatement Strategies (2 CE)
National Association of Enrolled Agents (NAEA) National Tax Practice Institute- June/July 2021 (virtual)
Level 1: Statutes of Limitations (2 CE); Ethics (2 CE)
Level 2: Penalty Abatement Strategies (2 CE); Capstone Course (co-teaching with Clarice Landreth) (2 CE)
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