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To Amend or Not Amend? Correcting Tax Return Errors

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Oh, what a relief it is to file your annual tax return! It feels like the final step to putting the prior year in the history books. But what do you do if you find an error on your return after you have filed? Should you file an amended return? Here are some things to consider.

Errors in the IRS’s favor:

Errors 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? The income you earn each year is reported to the IRS by employers, banks, and investment firms. The IRS uses this information and computer matching programs to catch errors. If there is a mismatch, you’ll receive a letter from the IRS requesting additional information and payment of additional taxes (plus interest!). The sooner you amend your return and pay the tax, the lower the interest and penalties that may be imposed.

Errors that result in a lower tax liability for you:

If correcting the error or omission results in a positive outcome for the taxpayer, it usually makes sense to file an amended return. There are situations, however, when it may not be in your best interest to amend your return. Below are the points you should consider:

  1. The period of time during which the IRS can audit your tax return could be extended if you file an amendment. 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 you file an amended tax return, the audit clock may change based on the amended return filing date and the degree of change requested. It may trigger a request from the IRS to extend the audit review period. The refund also resets the IRS erroneous refund recovery statute, adding another two to five years during which a review by the IRS is possible based upon the date of the latest tax return refund.
  2. The amended return may be examined. Amending a tax return puts a spotlight on your tax return. The IRS has certain topics that 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. Because of this, keep all the necessary records to substantiate your amended tax return close at hand.
  3. 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?
  4. 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 at the federal level will necessarily also be in your favor at the state and local level.
  5. Don’t expect the refund to be timely. Amended tax returns can take a long 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.
  6. Timing is important. There is a time limit to request a change to your tax return and receive an additional refund. It is typically set at three years after the initial filing deadline of the tax return. Make sure you file amended tax returns using certified mail. Should the IRS delay responding to your amended return, you may need to prove it was filed timely.
  7. If the refund amount is not large enough to justify an amended tax return, keep the documentation anyway. Should you be chosen for an audit, you can often present your case at that time to offset any additional tax liability discovered during an audit.

While finding an error or omission on your tax return can be unsettling, rest assured that there are ways to fix the problem. As with any complicated financial issue, the help of a qualified professional is essential.

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Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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