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Get a do-over on your tax return

If you made a mistake, you have several years to file an amended return. But you may owe a penalty if you underpaid your federal tax.

By Teresa Mears Mar 22, 2012 12:05AM

This post is by Bill Bischoff of SmartMoney.


It's a common occurrence during tax filing season to discover that you botched a previously filed return. Say you figured out that you missed some tax-saving deductions and credits on your 2010 Form 1040, which you filed about a year ago. Or you might have just learned that you failed to claim some breaks on your 2011 return, which was filed only a couple weeks ago.


Don't feel bad. With today's ultracomplicated tax rules, anyone can make a mistake. Now you can fix the mistake (whether it's in your favor or not) by filing an amended return using Form 1040X (Amended U.S. Individual Income Tax Return). While this might sound like a daunting task, it's actually pretty easy in most cases. Here's what you need to know.


The first thing to know is that you should not attempt to correct the situation by filing another original return using Form 1040. That will just confuse the Internal Revenue Service and cause headaches for you. Instead, be sure to file a Form 1040X, even if you're amending a 2011 return that was filed only a few days ago. (Post continues below video.)

If you're due a refund


If amending your return will produce a tax refund, the deadline for filing Form 1040X is generally the later of three years after the original return for the year in question was filed or two years after the tax for that year was paid. In most cases, the three-year rule is the one to focus on. If you filed your original Form 1040 before the April 15 due date, you're considered to have filed the return on April 15 for purposes of the three-year rule.


However, if you extended the return to Oct. 15, you're considered to have filed on the earlier of the actual filing date or the Oct. 15 extended due date.


For example, say you filed your 2010 Form 1040 on March 1, 2011, and paid the tax due on that date. You now realize you should have itemized deductions instead of taking the standard deduction. Based on the three-year rule, you have until April 15, 2014, to file an amended 2010 return, on Form 1040X, to claim your refund. On the other hand, if you extended your 2010 return to Oct. 15, 2011, and then filed before the extended deadline on Sept. 1, 2011, the three-year period for filing an amended return started running on Sept. 1, 2011.


Naturally, however, the sooner you file the amended return, the sooner you'll get your refund. Don't wait.


If you owe more tax


If you now realize you understated your tax liability on the original Form 1040, you're expected to file an amended return and pay the additional tax. If you don't and the IRS discovers the error, the government will bill you for the unpaid tax amount plus interest (currently at a 3% annual rate), the additional failure-to-pay interest charge penalty (at a 6% annual rate) and maybe other penalties.


The IRS can waive penalties if you show you had a reasonable cause for the underpayment. For example, you might have reasonable cause if you relied on incorrect advice from a paid tax professional or received incorrect information from a third party (like an erroneous Schedule K-1 from a partnership or S corporation investment).


The sooner you file an amended return on Form 1040X and pay the tax due, the sooner you'll stop racking up interest and the failure-to-pay penalty.


While you probably know the IRS doesn't audit very many returns, you're highly likely to get caught if your Form 1040 omitted income that was automatically reported to the IRS on an information return, such as Form W-2 or Form 1099. Also understand this: The IRS generally has three years after the date the original return was filed to discover errors and omissions and assess additional tax, interest and penalties. However, a longer six-year statute of limitations rule applies if the original return understated gross income by more than 25%. There's no statute of limitations on a fraudulent return.


If the original return understated your tax bill by only a relatively small amount, you should probably file Form 1040X and pay the feds if for no other reason than to clear your conscience. But if there was a large understatement, this is a can of worms you don't want to open before understanding all the consequences (including the possibility that your friendly state tax collector will get into the act). Consider hiring a tax pro with experience in dealing with past-due tax problems. Hopefully, you can get off the hook with minimal or no penalties. But be prepared to pay at least the past-due tax plus interest.


Form 1040X in a nutshell


Assuming there's no big past-due tax problem, you can probably prepare Form 1040X by yourself if you take your time and carefully follow the instructions. The form is only two pages long. Basically, you enter numbers from your original Form 1040 in column A of Form 1040X, any changes to original amounts in column B, and the corrected amounts in column C. You then explain each change in the space on page 2 of Form 1040X.


Be sure to use the current version of Form 1040X, which you can print out from the IRS website. (Right now, the current version is dated December 2011.) If you need to attach corrected or additional tax forms, be sure to use the forms for the year you're amending. For example, if you're filing Form 1040X to claim additional itemized deductions for 2010, you'll need to attach a corrected 2010 version of Schedule A. The IRS website has prior-year tax forms, too.


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