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Should you amend for a prior year carryover revision?

Is my client required to file an amended return for a prior year if the only change is revision of a carryover amount?

The answer to this question depends on whether:

  • Your client is an individual or business entity.
  • The change in carryover amount is the result of your client's discovery or a federal audit.
  • Your client is currently under audit by the Franchise Tax Board.

If your client is not under FTB audit

Individuals
Your client is not required to file an amended return reporting a change in a carryover item if it does not change their tax liability in the tax year. We recommend your client include a schedule with the first return where the tax liability is affected by prior year changes of a carryover amount. The schedule allows your client to inform FTB of prior year changes to carryover amounts where there was no change in tax liability.

Your client is not required to file an amended return after a federal audit unless the audit results in an increase in their tax liability [Revenue &Tax Code Section 18622(a)].

Business entities
As is true for individuals, business entities are generally not required to file an amended return to report a change in a carryover item if it does not change their tax liability in the tax year. We recommend your client include a schedule with the first return where the tax liability is affected by prior year changes of a carryover amount. The schedule allows your client to inform FTB of prior year changes to carryover amounts where there was no change in tax liability.

All business entities must file an amended return any time a federal audit changes gross income, deductions, penalties, credits, or tax [Revenue &Tax Code Section 18622(a)].

If your client is under FTB audit

If your client is under audit, discuss the carryover adjustments with the FTB auditor to determine whether you should file an amended return with the auditor. In most cases, any carryover adjustments can be included as part of the audit. If the audit determines that a reduction to a carryover amount is necessary, we will incorporate it into any adjustments, or issue a Notice of Proposed Assessment Carryover Amount. This notifies your client of a change in a reported carryover amount where no additional tax is due. The notice gives your client protest and appeal rights at the conclusion of an audit.

Always notify the auditor if your client is, or was, under federal audit, and the issues would affect their California return. If the IRS completes its audit before we complete our audit, send the FTB auditor a copy of the Revenue Agent's Report. If the IRS does not complete its audit first, follow the guidance provided under "Client not under FTB audit" above.

Important to know: The statute of limitations for a deficiency assessment does not begin until the carryover amount is used.

Example: A loss generated in 1999 was not discovered until 2005. Your client reported the 1999 loss carryover on the 2004 amended return, since this was the first return reflecting a change in the tax liability. Your client must be able to support both the 1999 loss, and the carryover amount reported on the 2004 amended return. Remember, the statute of limitations for the amount reported in 2004 is the normal 2004 statute, not the 1999 statute.