You think you made a mistake? Let me tell you about the time I made a $90,000 error. It was very embarrassing. This $90,000 was the very first entry I had made into the tax software for the client. When the return was finalized after two months of work, the $90,000 had disappeared.
It turned out that there was a major glitch in the commercial tax software I used that year (and never again). Many tax pros’ returns were afflicted with similar mistakes. I didn’t discover this error until we started putting the tax files away after tax season. Then, my heart stopped.
So, what do you do when you learn you made a mistake on your tax return?
There are different levels of errors. The simplest is an omission of a minor income amount from a 1099 of any kind. This generates additional taxes of $50 or less. Do nothing. The IRS will usually send you a letter (typically a CP-2000 notice) proposing additional taxes and a little interest, but no penalties. Pay the balance due and then file an amended return with your state for the additional income.
However, if you have made the same kind of error—an omitted 1099—but for a larger amount, or if you didn’t get a 1099 at all but you realize you omitted a big chunk of income, you may wonder if you should still wait for the IRS to notice. No. The interest will be much higher and penalties might be assessed, depending on the amount or nature of the taxes.
You will want to amend your IRS and state (if applicable) returns—but don’t rush. I have heard from people who received either original or revised 1099s late. They amended after the first one, then they had to amend again after the second, and so on. Wait a bit until you are sure that all the changes are in. Call the various investment houses or clients to make sure no more are coming.
What if the problem is not unreported income? Suppose you didn’t take advantage of expenses or deductions to which you’re entitled? Should you amend? It depends.
Yes: Amend if you have the evidence to prove that you paid those deductible expenses. If they were business or job-related, you also need to have proof that the expenses were ordinary and necessary for your business or job.
No: Don’t bother amending if the amounts are minor. Personally, for an additional refund of $100, less the costs for preparing and filing the amended return, I wouldn’t open up a hornet’s nest. Remember that even if you prepare an amended return yourself using online software, the IRS and state returns will cost you about $25 to $50, and a tax pro will rarely do it for less than $100.
No: If you don’t have all the proof and backup material to support the costs and the reason these costs are deductible, don’t amend. An amended return is handled like a mini-audit. And although the IRS is not meant to look at other parts of the return, sometimes that does happen, and it can generate a full-blown audit.
Oh yes, what happened to our $90,000 error? I immediately gave the client an amended IRS and state return. Did she file it? Honestly, I don’t know. She hasn’t spoken to me since. Can you blame her?
Eva Rosenberg, EA, is the publisher of TaxMama.com®, where your tax questions are answered. She teaches tax professionals how to represent you when you have tax problems. She is the author of several books and e-books, including Small Business Taxes Made Easy. Follow her on Twitter: @TaxMama