How to determine if and when you need to amend a prior tax return

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Yarlonkol12
Posts: 485
Joined: Thu Apr 11, 2019 4:28 pm

How to determine if and when you need to amend a prior tax return

Post by Yarlonkol12 »

Thanks to this forum, I've come to learn new information about tax code regarding wash sales. This is great knowledge to have going forward as I understand how to avoid these types of situations. However, how do people handle prior tax returns before they had this knowledge? Until last year I used to have a CPA prepare my taxes, and even though I do remember asking on a few occasions if he needed any trade statements from my retirement accounts he always said they were not needed. I'm not blaming him, I realize that my taxes are my responsibility and that all he can do is run with the information I provide him, but I really had no clue I needed to correlate trades across all of my accounts including retirement accounts.

So with all of that said, how far back in time is one obligated to go back in time to research and resolve any potential wash sale adjustments?

For example, in 2015 it looks like there could have been some wash sales that were triggered by automatic investment into the same ETFs/Mutual Funds in IRA, 401k, and HSA accounts within the window of selling the same ETF/Funds in my taxable account for realized losses.

It also looks like there could have been some of wash sales in 2017.

I say could have been because I'd still need to do more research to determine exactly which of these cases qualify or not as wash sales. Also, I don't have records for some of these accounts as the some of the buys occurred in HSA and 401k accounts from former employers, and the statements I have from these accounts do not include any transaction history. I also am not really sure if I am accounting for them correctly or not as I've read a few different interpretations of how to handle "replacement shares", or not. That's a topic for another thread though.

For what it's worth, in 2015 I didn't have any carry forward losses, but in 2017 and beyond I've had enough carry forward capital losses that the estimated impact of reporting more wash sales would be a reduction in my current carry forward capital losses and there would be no "realized underpayment" as of yet, but I believe I would need to revise the carryforward loss amount in all tax years between then and now so it's correct, assuming there are changes required.

So, first of all I just wanted to figure out how far back in time I need to research, thanks for any ideas
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jebmke
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Re: How to determine if and when you need to amend a prior tax return

Post by jebmke »

Three years
When you discover that you are riding a dead horse, the best strategy is to dismount.
michaeljc70
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Re: How to determine if and when you need to amend a prior tax return

Post by michaeljc70 »

Speaking from a practical standpoint, you cannot fix things if you don't have/cannot get the records. If you had a wash sale in 2015, you would add the prohibited loss to the basis. if you then sold the security in subsequent years, that would affect the taxing of that transaction (due to the higher basis). In other words, if you had the records, you might be fixing multiple transactions over multiple years due to one wash sale. This might have sort of auto-corrected already though not with the loss/gains being in the right tax year (and may not correct if the basis is added to securities in tax advantaged accounts).
JackoC
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Re: How to determine if and when you need to amend a prior tax return

Post by JackoC »

jebmke wrote: Fri Jan 14, 2022 8:05 amThree years
Three years is how far back the IRS can normally look if they audit you. There are exceptions where it could be longer, but they probably do not apply here. But, you have no legal obligation to correct errors you later discover on previous tax returns. The objective economic reason you might do this is if you believe it likely enough the errors will be discovered by the IRS in an audit that it's attractive to save interest charges by changing the return now. Interest and penalties do not depend on who found the mistake, you or the IRS, but there could be cases where you finding it sooner saves money over them inevitably finding it later. I don't see that applying here. The subjective shadow legal reason to correct a return is if you believe the pattern of facts around the error make it look enough like you did it on purpose: deliberate errors in your favor are a crime, honest mistakes aren't. I don't see that applying here either. The subjective ethical reason to do it is just to be 'square on your taxes' as a goal in itself. People have their own ideas about this, not worth debating IMO. I took the question to mean legal obligation, not whether somebody feels more 'comfortable' filing amended returns.

If I discovered what OP did, with the implication this isn't a great deal of money, I'd do it correctly in future, actually just avoid creating wash sales on taxable positions with activity in tax deferred accounts, not that hard to avoid once aware of the issue. I wouldn't file amended returns, nor change the basis on taxable positions due to those previous tax deferred trades which should have affected it. I'd just avoid doing it again.
Topic Author
Yarlonkol12
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Joined: Thu Apr 11, 2019 4:28 pm

Re: How to determine if and when you need to amend a prior tax return

Post by Yarlonkol12 »

JackoC wrote: Fri Jan 14, 2022 10:39 am
jebmke wrote: Fri Jan 14, 2022 8:05 amThree years
Three years is how far back the IRS can normally look if they audit you. There are exceptions where it could be longer, but they probably do not apply here. But, you have no legal obligation to correct errors you later discover on previous tax returns. The objective economic reason you might do this is if you believe it likely enough the errors will be discovered by the IRS in an audit that it's attractive to save interest charges by changing the return now. Interest and penalties do not depend on who found the mistake, you or the IRS, but there could be cases where you finding it sooner saves money over them inevitably finding it later. I don't see that applying here. The subjective shadow legal reason to correct a return is if you believe the pattern of facts around the error make it look enough like you did it on purpose: deliberate errors in your favor are a crime, honest mistakes aren't. I don't see that applying here either. The subjective ethical reason to do it is just to be 'square on your taxes' as a goal in itself. People have their own ideas about this, not worth debating IMO. I took the question to mean legal obligation, not whether somebody feels more 'comfortable' filing amended returns.

If I discovered what OP did, with the implication this isn't a great deal of money, I'd do it correctly in future, actually just avoid creating wash sales on taxable positions with activity in tax deferred accounts, not that hard to avoid once aware of the issue. I wouldn't file amended returns, nor change the basis on taxable positions due to those previous tax deferred trades which should have affected it. I'd just avoid doing it again.
JackoC, thank you this insightful post, really appreciate it.
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Topic Author
Yarlonkol12
Posts: 485
Joined: Thu Apr 11, 2019 4:28 pm

Re: How to determine if and when you need to amend a prior tax return

Post by Yarlonkol12 »

michaeljc70 wrote: Fri Jan 14, 2022 8:31 am Speaking from a practical standpoint, you cannot fix things if you don't have/cannot get the records. If you had a wash sale in 2015, you would add the prohibited loss to the basis. if you then sold the security in subsequent years, that would affect the taxing of that transaction (due to the higher basis). In other words, if you had the records, you might be fixing multiple transactions over multiple years due to one wash sale. This might have sort of auto-corrected already though not with the loss/gains being in the right tax year (and may not correct if the basis is added to securities in tax advantaged accounts).
Thanks the no records part makes sense, I think I'd also need to investigate some type of tax accounting software to take all the data into account as well. TurboTax doesn't offer any cross account wash sale computation features, (or even mention it, annoyingly enough)
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