There's usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.
Errors in the IRS' favor
Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a 1099 form or W-2 reported income. Why? This information is being reported to the IRS and matching programs will typically catch the error. The sooner you amend your return and pay the tax the lower the possible interest and penalties.
Errors that result in lower tax
If correcting the error or omission results in a large additional refund the answer is usually obvious. File the amended return. But this is not always the case.
- Your tax return may be open to audit for a longer period of time. Federal tax returns are typically subject to audit for three years after the original tax return due date OR the date the return was filed whichever is later. If your amended return is filed towards the end of the audit limits, additional time is automatically added. If the IRS wishes to review your return they may request you extend their review time. So if you have other areas in your tax return that might be audit risks you may have second thoughts regarding amending your return.
- The amended return may become examined. Amending a tax return could put a spotlight on your tax return. The IRS has certain topics that could trigger individual examination when amended returns are requested. Amended tax returns based on things like the Earned Income Tax Credit, Small Business Income and the Research Tax Credit for small businesses, could result in a visit from your local IRS examiner. Do you have the necessary records to substantiate your amended tax return?
- Amending one tax return, may require amending a number of them. Making a minor change in one year may require you to make changes in other tax years. This could result in resetting the audit clock on as many as three to four tax years. Is it worth it?
- Don't forget other taxing authorities. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor on the federal level will necessarily be in your favor on the state/local level.
- Don't expect the refund to be timely. Amended tax returns can take a long period of time to be reviewed. There have been cases where the IRS has delayed initial review of an amended return for more than a year, then decided to examine the return. While not typical, the process could take up to 1 1/2 years to resolve.
- Timing is important. Remember there is also a time limit to request a change in your tax return and receive an additional refund. This is typically set to three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.
- You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, still keep the documentation. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax.
While finding an error or omission on your tax return can be unsettling, rest assured there are ways to fix the problem, but it is often worth taking a balanced approach to determine the best solution.