Whether or not you should do it—and the consequences—depends on the details of your case, experts say
By Tom Herman
Broadway’s brightest star, Alexander Hamilton, summarized the problem neatly.
“In common life, to retract an error even in the beginning is no easy task,” Mr. Hamilton once wrote, according to Ron Chernow’s biography of the nation’s first Treasury secretary. “Perseverance confirms us in it and rivets the difficulty.”
While Mr. Hamilton wasn’t writing about income-tax bloopers, his words undoubtedly will resonate with millions of modern-day taxpayers. Nobody likes to admit mistakes, especially on tax returns. But as lawmakers continually add layers of complexity to the nation’s tax system, millions of taxpayers each year face thorny questions about how—and even whether—to fix errors and omissions.
Tax advisers say some clients fear that filing an amended return is tantamount to waving a red flag in front of auditors, tempting them to question every line. They would rather play the audit lottery and pray they won’t get caught. Others worry that trying to correct even relatively small errors will be too much for the IRS’s antiquated computer systems to handle and could create even more problems.
What to do?
That depends on the details of each case, such as the size, type, number and reasons for the errors. The process may appear relatively simple, but appearances can be deceiving, even in cases involving honest mistakes or new data.
What might seem to be a simple change “can ripple through” the entire tax return and affect many pages, says Claudia Hill, president of TaxMam Inc. in Cupertino, Calif., and an enrolled agent. (Enrolled agents are tax experts authorized to represent taxpayers at all levels of the IRS.) “It’s rarely a ‘simple’ change,” Ms. Hill warned in a recent CCH Webinar offered by Wolters Kluwer.
Even so, most taxpayers “shouldn’t be afraid at all” to file an amended return, saysStephen W. DeFilippis of DeFilippis Financial Group, a wealth-management and tax firm in Wheaton, Ill., and an enrolled agent.
Reasons for making amends vary widely. Examples include forgetting to report a dividend or interest payment, neglecting to take advantage of various tax credits or deductions, or receiving new information they didn’t have when they filed their original return. Sometimes, people receive fresh information about a partnership interest or a change in the amount of qualified dividend income received from mutual funds and other financial institutions.
What may be the right answer for one taxpayer may be wrong for another. Here are answers to some questions readers may have on fixing errors.
Q: How many people typically file amended returns?
A: Eric Smith, an IRS spokesman, says there were about 3.7 million amended returns filed on Form 1040X in the fiscal year ended Sept. 30, 2015.
Q: Can I file an amended return electronically?
A: No. You have to file the old-fashioned paper way.
Q: How quickly does the IRS handle amended returns?
A: Not quickly. Amended returns “take up to 16 weeks to process and up to three weeks from the date of mailing to show up in our system,” the IRS says in “Topic 308” on its website. Often, though, the process takes longer—much longer, Ms. Hill warned in a recent CCH Webinar offered by Wolters Kluwer.
Q: Should taxpayers bother fixing routine math errors?
A: The IRS says it “may correct mathematical or clerical errors on a return and may accept returns without certain required forms or schedules.” In such cases, “there is no need to amend your return.” However, the IRS says, “do file an amended return if there is a change in your filing status, income, deductions or credits.”
Q: Suppose I want to fix mistakes on tax returns for more than one year? Can I do it all on one Form 1040X?
A: No. File a separate Form 1040X for each year. The IRS wants you to mail each form in a separate envelope. Also, don’t forget to check out any state-filing requirements, Ms. Hill says. The IRS says to include “the year of the return you are amending at the top of Form 1040X.”
Q: Can I fix just one error and ignore all my other mistakes?
A: No. “If you file an amended return, you must correct all known mistakes,” Ms. Hill says. “You can’t cherry-pick what you want to fix.”
Q: Are taxpayers required by law to file amended returns with the IRS to fix errors?
A: No, says Bryan Skarlatos, a tax lawyer at the Kostelanetz & Fink LLP law firm in New York. But millions of people do anyway “because they want to get right with the IRS” and because they hope that filing an amended return and paying any balance due will enable them to avoid stiff penalties. Others who amend returns may qualify for a hefty refund or credit.
Q: How far back in time can I go to claim a refund or a credit on my federal return?
A: Generally, for a credit or refund, “you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later,” the IRS says in its Form 1040X instructions.
But there are exceptions. The time limit can be suspended for some people who are “physically or mentally unable to manage their financial affairs,” the IRS says. Another exception: An amended return based on bad debts or worthless securities generally “must be filed within 7 years after the due date of the return for the tax year in which the debt or security became worthless.” See Form 1040X instructions for other exceptions.
Q: What should I do if I want to come clean on something that might be construed as civil fraud or even criminal wrongdoing? Also, what if my return is already being audited?
A: This can be very tricky—and far too complex to delve into in this column. In short: Consider hiring a seasoned pro who specializes in such subjects. Remember that an amended return is “an admission that your prior return was wrong,” warns Mr. Skarlatos.
Some lawyers say taxpayers probably shouldn’t file an amended return if they’re already involved in a face-to-face IRS audit involving that return. In such cases, “it usually makes much more sense to speak to the agent about the issue,” rather than filing Form 1040X, says Mr. Skarlatos.
What’s the harm in filing an amended return during an audit? “I had a case where an auditor referred the case to the criminal unit because an amended return was filed,” says Mark Klein, a lawyer at Hodgson Russ. “Fortunately, it went nowhere. It would not have been an issue if the taxpayer had simply admitted the error to the auditor.”
Q: Will my chances of getting audited increase if I file an amended return?
A: Probably yes, several tax advisers say. “It makes sense that a taxpayer who files an amended return for a particular year is much more likely to be audited than a taxpayer who files only an original return because an amended return is a second submission to the IRS with respect to the same tax year which itself increases the chance that one of the two returns will be audited,” Mr. Skarlatos says. “Further, the amended return requires an explanation of what has been changed and the explanation can easily give rise to questions.” In addition, some amended returns request refunds “which may trigger a review before a check is sent to the taxpayer.”
An IRS spokesman says he isn’t aware of any statistics on the subject.
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