How to correct a tax return mistake
If you made a mistake, you can wait for the IRS to track you down. But it's better to file an amended return as soon as possible.
This post is by Robert W. Wood of Forbes.com.
1. Amended returns aren’t mandatory. You might be surprised to find you are not obligated to file an amended return, even though tax advisers may tell you it’s a good idea. That’s because the IRS will probably send you a bill based on the revised Form 1099 or K-1 once IRS computers match that form against your return.
Amended returns are not mandatory even if something happens after you file that makes it clear your original return contains mistakes. Ask if the return you filed was accurate to your best knowledge when you filed it. If it was, you are probably safe in not filing an amendment.
Conversely, if you knew your return was inaccurate when you filed it, you should amend it to make it accurate without delay. The IRS rarely brings up an originally filed return in civil audits or criminal prosecutions once the taxpayer attempts to correct it by filing an amended return. But to take advantage of this rule, you need to be proactive, and you need to make the correction before the IRS finds your error. (Post continues after video.)
2. You can’t cherry-pick what you correct. You don’t have to file an amended return, but if you do, you must correct everything. You can’t cherry-pick and only make corrections that get you money back and not those that increase your tax liability. If you amend, you must correct all errors, not just the ones in your favor.
3. Some errors don’t merit amending. Math errors are not a reason to amend, since the IRS will correct math errors on your return. Likewise, you usually shouldn’t file an amended return if you discover you omitted a W-2, forgot to attach schedules or other glitches of that sort. The IRS can process your return without them or will request them if needed.
Certain parts of your original return can’t be changed by an amended return. For example, you can change your filing status on an amended return from married filing separate to joint, or from qualifying widow(er) to head of household status. However, you cannot change from married filing joint to married filing separate after the due date for the original return (usually April 15) has passed.
4. Timing counts. You must file a Form 1040X, Amended U.S. Individual Income Tax Return, within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later. This either/or test can give you extra time, but it is safer to amend within three years of your original return so there’s no dispute.
How soon is too soon to amend? You can file an amended tax return right on the heels of your original return if you like. However, if you are filing to claim an additional refund, you should wait until after you have received your original refund before filing Form 1040X. You may cash the first check while waiting for any additional refund.
5. Only paper will do. Even if you filed your original return electronically, you’ll have to amend on paper.
6. Amend each year separately. If you are amending more than one tax return, prepare a separate Form 1040X for each. Mail each amended return in a separate envelope.
7. Amended returns are more likely to be audited. Few tax returns are actually audited, but tax lawyers must advise clients based on the assumption every tax return will be examined. Amended returns are more likely to be examined than original returns.
8. Refunds can be applied to estimated taxes. If you file an amended return asking for considerable money back, the IRS may review the situation even more carefully. As an alternative, consider applying all or part of your refund to your current year’s tax. That can be lower profile.
9. Beware special statute of limitations rules. Normally the IRS has three years to audit a tax return.You might assume that filing an amended tax return would restart that three-year statute of limitations. Surprisingly, it doesn’t.
If your amended return shows an increase in tax, and you submit it within 60 days before the three-year statue runs, the IRS has only 60 days after it receives the amended return to make an assessment. That means if the IRS doesn’t audit in that 60 day window, you’re home free.
Planning opportunities? Some people amend a return right before the statute expires. Plus, note that an amended return that does not report a net increase in tax does not trigger any extension of the statue of limitations.
10. Don’t forget interest and penalties. If your amended return shows you owe more tax than you originally reported and paid, you’ll owe additional interest and probably penalties. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions. The IRS will compute the interest and send you a bill if you don’t include it. If the IRS thinks you owe penalties it will send you a notice, which you can either pay or contest.
Conclusion: Amended tax returns are tricky. You should never take tax return filing obligations lightly, and your original return should be as accurate as you can make it. If you discover afterward that amendments are needed, make sure you think through the various ramifications of filing an amended return.
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