First Person: How to Handle Tax Return Errors

No matter how careful you are, how great the tax software you used is or how experienced your tax preparer is, there always exists the possibility of incorporating an honest error into your income tax return. You may have erroneously claimed a credit that you were not entitled to or received an amended or late income slip in the mail. How should you handle errors on your tax return?

Never ignore errors.

If you find an error on your return, the worst thing that you can do is to do nothing about it, especially if you owe. If the IRS finds the error on their own, your odds of a full audit increase as you are showing the government that you may not know how to complete your taxes correctly. Always file a corrected return, regardless of whether it means you will be getting more money back or whether you owe.

File an amendment on Form 1040-X.

Changes to your original tax return are filed on Form 1040-X. The form allows you to input your original amounts, the net change to each line and the amended amount. Even changing something small can affect many different lines, such as deduction limits and tax owing. At the end of the form, you will write your additional tax owing or refundable due to the changes. If you owe further taxes, attach a check with the amended return to avoid further interest and penalties.

Attach documentation to the amended return.

Although amending a return puts it under additional IRS scrutiny, the more documentation for the changes you include, the less likely you are to trigger an audit. If the changes are clear and the reason for the error sensible, the IRS is more likely to accept your amendment without further investigation. Self-identifying errors is always the best way to go. If you received additional income slips, attach copies to the amended return. If you are claiming further deductions or credits, provide as much documentation as you can to satisfy the IRS.

Expect penalties and interest on any further amounts owing.

It doesn't matter that the error was accidental. Nor does it matter that it is your tax preparer's fault and not yours. You are responsible for correctly filing your taxes. If you owe further amounts due to the error, there will be penalties and interest applied to the balance for late payment. The IRS will send you a notification with the interest and penalties. Pay this amount upon receipt.

File amendments before your time runs out.

You only have three years from the original due date of the return to file an amended return. If the IRS owes you a refund, you will lose it if you do not file the amendment within this statutory period. If it is an amended income slip that you have missed, the IRS will most likely have caught it themselves before the statutory period ends and that can trigger an audit of the rest of your return. Always file amendments as soon as you discover the error.

More From This Contributor:
Renting Versus Buying a Home: What Makes Sense in This Uncertain Economy?
Most Commonly-Missed Tax Breaks
Is Your Teenager Money-Savvy Enough to Go to College?