HOW TO APPLY FOR A TAX REFUND AFTER YOU'VE FILED -- AND HOW IT MIGHT FINANCE YOUR BUSINESS It is very easy to file an amended federal tax return, and normally you may do so within three years of filing the original return (or two years of paying the tax). This is not something that will cause an audit, but if you are the nervous sort you can wait until just before the three year deadline. In that case the three year statute of limitations on the original return will have expired, and only the amendments can be audited. But there is really no reason to wait, and you can put the money to better use than the government. (The only exception to this is that if you have a refund pending for the same year, it is better to wait until you receive it before filing the 1040X.) State returns can also be amended, but you will have to check with your state for details. It does not matter what type of form you used originally -- 1040, 1040A, or 1040EZ. Perhaps you filed 1040EZ and realized later that there were deductions you failed to take. A Form 1040X is the amended return to use in all personal income tax claims, and all you have to do is calculate what your original return should have been. 1040X is also the form to use if you discover that you made a mistake the other way. To take an extreme example, if you claimed an exemption for the family dog, you can correct yourself with a 1040X. It won't cancel your original sin, but coming forward with the correction yourself can do much to alleviate the consequences. (The IRS reports that an amazing number of children disappeared the year after the requirement for listing a child's social security number on the return to claim an exemption took effect.) Anything on your return can be amended with 1040X. So if you see items that might have made a difference in your last three year's tax returns, get out your copies and recalculate the return as if you had originally deducted those items. Then transfer the results to Form 1040X. If the changes require a schedule that was not attached to your original tax return, you can add it to Form 1040X. For example, supposing you listed miscellaneous income as a line item on your 1040 but did not treat it as a business. You now realize that if you treated it as a business you could deduct the expenses related to it. All you have to do is complete a schedule C for the year in question, include the results on 1040X, and send it in. Since the forms change from year to year, you may need to get a schedule, return, or instructions for the prior year. The forms are available from the IRS for several years afterwards. Just write to IRS Forms Distribution Center, Box 25866, Richmond VA 23289 and list the forms and years that you need. Let them know if you need instructions for that year (for example, because you need the tax table or exemption information for that year). Usually they have the old instruction books also. If the instructions for the year you need are out of stock at the IRS, most public libraries keep several year's worth of basic tax information books, such as the annual J. K. Lasser tax guide, which will give you the necessary tax table information. Another IRS form, number 843, covers refund claims that are not part of a personal tax return. Form 843 allows a claim back for three years for such things as overpayments of excise taxes, withholding taxes on your maid, or corporation income taxes. There is one area in which a refund of back taxes can work miracles. Most business losses in excess of the current year's income (whether proprietorship, share of partnership, or Subchapter S corporation) carry back for three years -- not just forward into future years. This rule also applies to charitable contributions that exceed the limit for the current year. In both of these cases, you can use the amount of deduction that you can't use in the current year, and get a refund of the taxes you paid in the earlier years, up to the point that the entire loss credit is used up. You can also do this more than once. For example, you have a current year business loss which gets you a refund of all of the third prior year's taxes and part of the second prior year's taxes. If next year you continue to have a loss, the second prior year is now the third prior year, so it hasn't been wasted. It is not too late to get back the rest of the taxes you paid that year. In other words, two refunds for the same year! (It is not impossible to have three refunds for the same year -- if first filed a 1040X in the current year for deductions you overlooked, then in two future years had a business loss that you could carry back.) Business losses can be carried back without using an amended return on Form 1040X, if you use Form 1045 to claim the refund within 12 months after the end of the year in which the net operating loss or credit occurred. (Corporations can do the same thing on a Form 1139, to get a refund on earlier corporate taxes.) If it is after the deadline to use a Form 1045, you haven't lost out. The same carryback loss can be used to claim a refund up to three years back, but it must then be done by using Form 1040X to amend the year for which the refund is being taken. It's your money -- don't let fear of the IRS keep you from claiming it. And that cash in your pocket now is more valuable than the possibility of crediting the loss towards some future year's income. This technique can also help finance a business. Supposing, that you lost a high salaried job, as so many have in recent years, on which you were paying high income taxes. Tax refunds could be a reason to start your own business immediately, even if you are still looking for another job. You open a business which has first year losses, a fairly normal situation. Immediately after the end of the first year (which might be only a partial year if you opened the business late in the year) you file a 1040X to carry those losses back to the third prior year, thus raising cash to finance the business. For a high-salaried executive going into his own business, timing this can be a very valuable part of tax planning -- you may want to cram all the deductions you can into that first tax year of business in order to get the largest possible refund from an earlier year for financing your business today. And this financing is free money -- it is taxes you already paid and that will be lost forever once the three year time limit goes by.