Have you ever wanted a second chance, the opportunity of a true do-over? When it comes to taxes, you can amend your tax returns, but that isn’t the same as starting over. If you sell your house but in six months refund the money and take back the house did you ever sell it? If you buy stock but the company refunds your money, was it two transactions or none? Going back to square one may sound simple, but the tax system is rigid and rarely simple.
And the annual tax return filing requirement means in most cases every tax year stands on its own. Fortunately, the IRS agrees that some transactions can be unwound and that tax effects can be ignored. But to pretend a deal never happened you must meet two tough conditions: (1) Each party must go back to its position before the transaction as if it never occurred. Rescission isn’t a one-sided deal. (2) The go-back must occur in the same tax year as the deal. The IRS covers this in Revenue Ruling 80-58.
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