You may decide to revise a return for a previous year if it comes to your attention that you made a mistake on it. There are two main reasons people file an amended return, to claim extra deductions or credits that they overlooked or to correct a previously improperly claimed deduction. Needless to say, the IRS receives many more amended returns for the prior than the latter.
To correct a prior year's tax return you must use Form 1040X, Amended US Individual Income Tax Return. In order to claim a deduction for a prior year, you must file an amended return within three years from the date the original return was filed or within two years from the time the tax was paid, whichever is later. This three-year rule is suspended for anyone suffering from a disability that renders him unable to manage his financial affairs. However, when another person, such as a guardian or spouse, is authorized to act on the disabled taxpayer's behalf, this rule does not apply and is restricted to the three-year rule.
An amended return is also permitted when a net operating loss is involved. A net operating loss (NOL) occurs when you lose more money in a business or profession than you gain through all other incomes. You have two choices when you have incurred a NOL, you can carry it back to offset your taxable income for the two previous years or you can carry it forward to serve the same purpose. To carry back a NOL, you will need to use Form 1045, Application for Tentative Refund if you are filing within one year of the year you had the NOL. If it has been more than one year, you must use Form 1040X, Amended US Individual Income Tax Return. A three-year carryback can be used when pertaining to casualty and theft losses as well as NOL losses incurred by small businesses in a presidentially declared disaster area. A five-year carryback of an NOL can be used when pertaining to farmers.
Amended returns are also useful in the following situations: