Have a Tax Question? Ask a Tax Expert
Assume it is realized that a former CPA incorrectly calculated depreciation on a residential rental for years 2006 through 2012 and that now the home has "sold" due to foreclosure.
Assume the tax payer has determined it is most correct to amend these prior year returns.
Assume that the change to how depreciation is calculated is due to "attached" rental improvements, 2 new toilets and a dishwasher, being depreciated separately via 200% DB, HY convention, 7 year useful life instead of how they should have been depreciated: S/L MACRS mid-month over 27.5 years.
Besides using the appropriate forms to indicate amendment is being requested/submitted, is there anything else special about how this should be treated?
Should an explanatory attachment be included that says something in particular, or will the simple explanation I provided above suffice?
Are there issues this might create that I should be aware of?
Is it possible to do this: change the depreciation method and basis of depreciation for the building and the improvements mentioned above, i.e., any special elections or anything have to be made?
Hello and thank you for using Just Answer,You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations:You claimed the incorrect amount because of a mathematical error made in any year.You claimed the incorrect amount because of a posting error made in any year.You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.Generally, you must get IRS approval to change your method of accounting. You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. You need to file the 3115 to change the accounting method for the depreciable property because yu are asking for a change in the depreciation method, period of recovery, or convention of a depreciable asset.
You would then file your change on the current year return and not amend the prior years.
Would 3115 also address the fact that the FMV used in prior returns was incorrect too? Another JA expert, LEV, said I'd have to amend to correct the error given these exact set of circumstances. I guess I'd need more specific guidance on how to actually do it if no amendments necessary and how it would play out on 2012 Schedule E and 4797.
If you ask for the change in accounting for the depreciation problem the change would be reflected onthe current year return. You can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into account in the year of change and is reported on your business tax returns as “other expenses.”You could file the amended return to make the corrections if you claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. As you did this after that dtae you would need to rquest the change in accounting.
As you have received some info on this from another expert if you want to confirm their understanding of the situation based on information you already discussed with them, you can request that expert. They can continue with you.
Thanks Robin D, it was a slightly different question than the other expert, you made me aware of some facts that I was not aware: specifically, the 2003 cut off date and the possibility of handling this via the 481(a) adjustment in current year only. So, wrt using 3115 (which I'll read up on shortly), I am assuming that there is a part of that form that applies specifically to only, say, depreciation changes. Having not used the form before, I thought it was just for changing accounting methods from cash to accrual or vice versa. I am not a tax pro, this is for my personal return. I may have other questions after I read up on instructions to 3115, but hopefully not. I love the idea of not having to amend all those prior years. Thanks!
Thanks for the follow up Robin D, especially with regard to the citation in Pub 946. I am reading up on it and filling out the input screens in UltraTax CS right now.
I thought I should follow up for the benefit of others that the 3115 route for correcting depreciation in this case won't be possible either because of a change in useful life that would be required, both for the improvements and the building (the CPA used 39 years for residential property when she should have used 27.5 and she should have used 27.5 years for the "attached" imrovements, but she used 200% DB HY 7 year). See p14 of Pub 946 second paragraph left column:
"Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following:
* An adjustment to the useful life of a depreciable asset for which depreciation is determined under section 167."
And, we've already established that I can't go the amendment route due to the pre-Dec 30, 2003 placed in service date required. So, there is actually no known path to correct this error. I find this comical since it would have benefited the IRS and not me (but only to the tune of exactly $2,080; updated correction: $2,043). So, I may just mimick what I think my former CPA would do and keep things consistent and hope that the passage of time and eclipse of statute of limitations work in my favor since she only ever separately listed the improvements on a 4562 in 2009 and never again (though their depreciation value, erroneous as its method of calculus was, was summed into the one depreciation value on Schedule E). So one could just fill out 4797 and not list the improvements separately there and keep things as they've been and let 2009 disappear into the statute of limitations sunset. Hmmm..... I want to do the right/correct thing, but I have a feeling this is what my former CPA would do since it was her mistake anyway.
Thanks Robin D. Yes, I give lots of detail so that hopefully it can help others. I appreciate your consideration. Have a wonderful day.