Taxation - Made a Mistake? You Can Make Amends

Although an amended return will make the IRS sit up and take notice, if you do it right, your chances of being audited may actually decrease.

I know you were careful. You did the math. Your tax preparer did the math. You double-checked HIS math. But sometimes, no matter how hard you look at a figure, that error you just made -- or that your preparer just made -- doesn't register in your mind.

This is not the end of the world. When a mistake is made on your tax return, correct it. The error may be in your favor, or in favor of the IRS. But in any case, correct it. It may be due to a missed deduction, an incorrect interpretation of the law or facts, or simply to a late or corrected W-2 or 1099.

Fortunately, the IRS recognizes that your tax return may need to be corrected and actually has drafted a specific form for that purpose. This form is easy to complete. It has three columns: one for what you originally reported, one for the changes in the numbers and a third for the final, corrected numbers. On the back you explain the reason for the change, such as you received a late 1099, or there was a missed deduction, or you found additional charitable contributions, and so on.

If the change is due to a corrected 1099 or other third-party document, attach a copy to your return. If the change is due to a deduction you missed, attach a copy of the receipt for the additional deduction to the return. While not necessary, I suggest you try to attach documentation to "prove" your change.

The very fact that you filed an amended return will not, in and of itself, increase your chance of being audited. However, what you change and the magnitude of that change might trigger an audit. By its very nature, an amended return demands extra scrutiny by the IRS. An agency representative must call up your old return and compare the changes with the new return. That gives the IRS twice as many chances to see something that concerns an agent.

Prove those deductions
Attach substantiation for the changes on your Form 1040X. If the change, for example, is a huge charitable contribution missed on your original return, the IRS computer will pop out your return for human review. That's where your attached substantiation should dissolve any audit questions, because you've already "proved" your deduction.

In fact, by attaching substantiation of the change to your amended return, you have shown the reviewing agent that you know the rules, and actually would be a poor audit risk. You may have actually decreased your chances of a full audit.

When can you amend your return? The normal statute of limitations for a tax return is three years. That means that you have three years from the due date of your return to amend your return.

For example, your 2002 individual tax return should have been filed by April 15, 2003. Now that April 15, 2006 is passed, I'm sorry but you can no longer amend that return. If you have found a mistake on your 2003 return (which should have been filed by April 15, 2004), you have until April 16, 2007 to amend it. (Not April 15 because it falls on Sunday.)

This statute of limitations is really important if you are due a refund and haven't yet filed your return for the current year. Some people, if they think they're due a refund, take the easy route and procrastinate. They know they don't owe any additional tax, and therefore figure there's no rush in getting that return out to the IRS. They're wrong.

Use refund or lose it
If you don't file your tax return within three years and you're owed money, sorry. You just don't qualify at all to get it back.

But if you are due a refund, the statute of limitations begins running on April 15 of the year it's due. That why if you find that problem with your 2003 return, get it in by the next expiration date, April 16, 2007. If you have a problem with your 2004 return, you have until April 15, 2008 to amend the return.

Everyone -- even the government -- will agree that you overpaid and that the IRS should have sent you your refund. But they won't, and, under the law, you can't make them. In fact, you can't even use that "refund" to offset taxes for future years; it's lost forever.

That's the nature of the statute of limitations. It limits the time both you and the IRS have to make changes. The IRS has actually publicized the fact that it's holding billions of dollars in unclaimed taxes.

If you haven't filed . . . file! There are penalties for not filing separate from the issue of whether you owe any money. If you have filed and received a corrected or late 1099, file an amended return. The IRS computers are going to be looking for those corrected numbers.

Alternatively, if you found out that you missed a deduction or a credit two years ago, file an amended return. And make sure they give you the interest owed for holding your money. (Unfortunately, that interest will be taxable.)

One should consult with a qualified taxation professional prior to implementing any taxation strategies.If you are a tax, insurance, financial or financial planning professional receiving this newsletter, please call our office and introduce yourself to us. We are always seeking to grow our referral network and expose more service professionals to our client base.