Think Twice Before Amending a Tax Return

Is it always a good idea to amend your tax return if you find an error?

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’s 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 Form 1099 or a Form W-2. 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 a lower tax liability

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. Consider the following scenarios:

  1. The amended return may become examined. Amending a tax return puts a spotlight on your tax return. The IRS has certain scenarios that trigger individual examination when amended returns are requested. Amended tax returns based on items such as the earned income credit, or the research and development credit for small businesses, could result in a visit from your local IRS examiner. Because of this, keep all the necessary records to substantiate your amended tax return close at hand.
  2. Amending one tax return may require amending several other returns. Making a minor change in one year may require you to make changes in other tax years. Is it worth it?
  3. Don’t forget other taxing authorities. Making a change on your federal tax return may require filing an amended state or local tax return. Do not assume that an amendment in your favor at the federal level will necessarily also be in your favor at the state and local level.
  4. Don’t expect the refund to be timely. Amended tax returns can take a significant period of time to be processed. 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 18 months to resolve.
  5. Timing is important. Remember there is also a time limit to request a change to your tax return and receive an additional refund. This is typically set at 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.
  6. 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 determining whether you need to file an amended tax return.

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