Forex Articles

Anyone can make a mistake on their tax return, but the sooner you remedy it, the less costly – in terms of interest and penalties – it will be. You'll need to decide whether you need to file an amended return, and, if yes, when to do it and how.

If you failed to report income that's been reported to the IRS on an information return (a W-2, 1099 or Schedule K-1), reported the wrong amount (e.g., you reported $2,488 instead of $4,288), or made a math error, you don't have to do anything. IRS computers will find your error and send you a letter requesting payment of taxes, interest and penalties, if any, due. If you agree with the IRS letter, simply send in your payment and the matter is closed. If you discover an error that produces an underpayment, you certainly can amend the return promptly and pay what you owe without waiting for an IRS letter. This action on your part will minimize interest charges on the underpayment, which begin to run from April 15 until you pay the balance due.

If you failed to claim a deduction (see 7 Most Overlooked Tax Deductions) or credit to which you were entitled, claimed less than the correct amount, or failed to claim a deduction or credit carryover from a prior year, the burden is on you to fix the problem; the IRS will not voluntarily send you a refund or alert you to your overpayment. However, decide whether the process of filing an amended return is worth it. Consider:

• The amount of the refund at stake versus the cost for the amended return if you pay a tax professional for this service. If you do it yourself, consider your time.
• The risk of attracting more attention to your return. While there are no statistics or other data showing that amended returns invite audits, the fact that paper returns get a human once-over may pose an audit risk.

The tax law has a statute of limitations, which is a period after which action on a tax return is barred. This means that if you underpaid your taxes because you omitted income, the IRS cannot ask for payment after the statute of limitations has run. On the other hand, this same period bars you from requesting a refund after it has expired.

The statute of limitations usually is three years from the original due date of your return, or the date of filing if it was after the due date. This period is six years if the IRS believes you omitted more than 25% of your gross income. And it is seven years for claiming a bad debt deduction or a write-off for worthless securities. So this is the period in which you must file an amended return if you're requesting a refund.

If you were owed a refund on your original return, wait to receive it before filing an amended return to request an additional refund. Acting too soon can confuse things.

Whether you filed Form 1040, 1040A or 1040-EZ – on paper or electronically – you must file Form 1040X on paper. There is no electronic filing as yet for amended returns. Essentially, all you do is list in three columns what you reported, what should have been reported and the difference.

Be aware that amending your federal return can have an impact on your state income taxes. The federal government shares information with most of the states, so if your amended return shows additional taxes due you'll likely owe your state more money. Find more information about filing amended returns in IRS Tax Topic 308 - Amended Returns. (And to help you detect any mistakes before you file your return, read Top 10 Tax Filing Mistakes – And How To Avoid Them.)