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Ten IRS Rules for Amending Your Tax Return

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Ten IRS Rules for Amending Your Tax Return

 

No. 1: Amended returns are NOT mandatory. This may surprise you, but you are not under an affirmative obligation to file an amended tax return, unless the mistake is not in your favor. You must file a tax return each year with the IRS if your income is over the requisite level. In fact, you can be prosecuted for failure to file (a misdemeanor) or for filing a knowingly false return (a felony). As Wesley Snipes’ convictions shows (three years in prison and a $5 million fine) for willfully failing to file millions of dollars' worth of past tax returns, carries smaller penalties than filing a knowingly fraudulent return (fines up to $250,000 for an individual or $500,000 for a corporation and up to 3 years in jail, per year, along with the cost of prosecution for high dollar tax fraud). But once you’ve filed, you can’t be prosecuted for failing to file an amended return, even though something may happen after you file that makes it clear your original return contains mistakes. So first ask yourself whether 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. If the original return was NOT accurate to your best knowledge when you filed it,  filing an amended return before the IRS reaches out to you, is in your best interest.

No. 2: You cannot 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 make only those corrections that get you money back, but not those that increase your tax liability.

No. 3: Some errors don’t merit an amended return. Math errors are not a reason to file an amended return, since the IRS will correct math errors on your return. However, you usually should file an amended return if you discover you omitted a Form W-2, forgot to attach schedules, or other glitches of that sort. It is our opinion that filing an amended return is far less stress than dealing with an IRS CP 2000 Under-Reporter Inquiry.  The IRS is notoriously wrong when they recalculate the outcome of the return with the missed information.

No. 4: Timing counts. You must amend within three years of your original return filing if you are expecting to receive a refund. Actually, 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.

No. 5: Only paper will do. Personal amended returns are prepared on Form 1040X. You must use this form regardless of the previously filed form (Form 1040, 1040A, 1040NR or 1040EZ). Personal amended returns are only filed on paper, so even if you filed your original return electronically, you’ll have to amend on paper.  Many of the amended entity returns can now be filed electronically, but the personal return must be filed on paper.

No. 6: You must amend each year separately. If you are amending more than one tax return, prepare a separate 1040X for each year.  It is also a mistake to place more than one amended return in the same envelope.  It is best to send each amended return separately to the IRS.

No. 7: Amended returns are more likely to be audited. In general, amended returns are more likely to be examined than original returns.  So, be prepared to substantiate the changes to your return. If fact, it is best to audit proof your amended return by provide all of the substantiation for the reviewer to reach the proper conclusion and not make a referral for audit.

No. 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, you can apply all or part of your refund to your current year’s tax in the form of an estimated payment.  This would be requested in the narrative of the amended return.  The IRS really scrutinizes amended returns requesting substantial refunds.

No. 9: The statute of limitations on audit is kind to amended returns. Normally the IRS has three years to audit an original tax return (6 years if income is substantially underreported by 25% or more). You might assume that filing an amended tax return would restart that three-year or six-year statute of limitations on audits. Surprisingly, it doesn’t! In fact, if your amended return shows an increase in tax, and you submit the amended return 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. This narrow window can present 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 statute of limitations.

No. 10: Don’t forget interest and penalties. If your amended return shows you owe more tax than you reported on (and paid with) your original return, you’ll owe additional interest and probably penalties too. Even though you might be amending a return from two years ago, the due date for your original return and for payment has long passed. 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.

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