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How to Correct Past Tax Mistakes Before an IRS Investigation Starts

How to Correct Past Tax Mistakes Before an IRS Investigation Starts

Making mistakes on your taxes is common. According to the IRS, the most frequent errors taxpayers make are:

  • Forgetting to sign the return
  • Miscalculating taxable income
  • Incorrect bank account numbers
  • Math errors
  • Errors in figuring tax credits or deductions

Luckily, there are ways to correct these mistakes before the IRS catches them. This article will explain when and how to file an amended return, respond to IRS notices, and take other steps to fix past tax errors.

When Should You File An Amended Return?

An amended return, or Form 1040-X, is how you correct errors on a previously filed tax return. Here are some common situations when filing an amended return is needed:

  • You made a mistake calculating income, deductions, credits, or anything else affecting your tax liability. For example, you claimed a deduction you weren’t actually eligible for.
  • You forgot to report some taxable income.
  • You need to change your filing status – for example, from married filing jointly to married filing separately.
  • There was an error in reporting bank account numbers or your address.
  • You need to correct your name or Social Security number.
  • The IRS adjusted your return and you want to make additional changes.

Basically, if you need to update or correct any information on your original return, an amended return is the way to go.

You should NOT file an amended return if:

  • You forgot to attach required forms or schedules. Just send those in separately.
  • You want to change your address. File Form 8822 for address changes.
  • The due date for filing your return hasn’t passed yet. Just file a new original return with the correct info.
  • You need to respond to an IRS notice about math errors or income matching issues. Follow the instructions in the notice.

When Should You NOT File An Amended Return?

There are a few situations when an amended return is not the right approach:

  • If you want to challenge the results of an IRS audit. In this case, you’d need to use the audit appeal process.
  • If it’s been more than 3 years since you filed your original return and you want to claim a refund. At that point, the statute of limitations has expired.
  • If you failed to file a return at all. To file late, you’ll need to submit a delinquent return, not an amended one.
  • If you want to request an installment agreement to pay your tax liability over time. Use Form 9465 instead.

So in summary, amended returns are for correcting errors on returns you’ve already filed. If you need to take other actions like appealing an audit or requesting a payment plan, an amended return isn’t the way to go.

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How Do I File An Amended Return?

Filing an amended tax return is a straightforward process:

  1. Get Form 1040-X. This is the official IRS form for an amended return. You can download it from the IRS website.
  2. Fill out the form. On Form 1040-X, you’ll report the changes you need to make and explain why you’re amending your return.
  3. Attach any new documentation. Include any schedules, forms, or documents that relate to the changes you are making.
  4. Recalculate your tax liability. Determine if the changes impact the total tax you owe. The form includes space to show your recomputed tax liability.
  5. File the amended return. You can e-file Form 1040-X through tax software or mail a paper copy to the IRS.
  6. Pay additional tax, if needed. If your changes increase your tax liability, include payment for the additional tax owed when you file. The IRS will let you know if you are due a refund.

Be sure to follow all instructions and fully explain each change you are making. The IRS will process your amended return and make corrections to your account. It may take up to 16 weeks for processing.

How Far Back Can I Amend My Tax Returns?

Generally, you can file an amended return to correct errors on returns filed in the last 3 years. So if it’s currently 2023, you could amend returns back to 2020.

There are a few exceptions:

  • If you want to claim a refund, you only have 3 years from the filing deadline to amend and claim the refund.
  • There is no time limit if you underreported gross income by more than 25%. Amending to report additional income can prevent penalties.
  • If you amend to take advantage of certain tax benefits like net operating loss carrybacks, you may be able to amend older returns.

The statute of limitations sets limits on how far back you can amend. Work with a tax pro if you need to amend returns older than 3 years – the rules can be complex.

What If I Didn’t File A Return?

If you failed to file a past year’s tax return at all, then filing an amended return isn’t the right approach. Instead, you need to file a late original return.

Use the Form 1040 package for the year you’re filing for. Write “Amended Return” clearly on the top of the return. Attach any schedules or forms that are required.

Pay any tax due with the late return to avoid penalties and interest. The IRS has special procedures for filing past due returns.

You generally have 3 years to file past due returns and get a refund of any taxes withheld or paid. If you wait longer, that refund could be lost.

How Do I Respond To An IRS Notice?

Getting a notice from the IRS about your tax return can be worrying. Notices could be for:

  • Math errors – the IRS found a calculation error that changed your tax liability.
  • Income matching issues – amounts you reported don’t match forms like W-2s sent to the IRS by employers.
  • Underpayment – you didn’t pay enough tax when you filed your return.
  • Audit – the IRS requests documentation to verify items on your return.

Whatever the reason, don’t panic! Read the notice carefully and follow the instructions. The notice will explain what response is required from you, if any.

If you need to make changes or provide more information, reply by the deadline in the notice. Include copies of any forms or documents requested.

You can also call the IRS contact number in the notice to discuss the issue. Be sure to respond promptly to avoid additional interest and penalties. Handling IRS notices quickly can save you a lot of headaches down the road.

Can The IRS Audit Me After I File An Amended Return?

Yes, filing an amended return could potentially trigger an IRS audit. When you amend your taxes, you’re basically telling the IRS that your original return was incorrect. Naturally, this raises a red flag.

The IRS pays close attention to amended returns reporting additional income or tax due. They will likely want to verify the new information you provided is accurate.

However, just because you amend doesn’t necessarily mean you’ll be audited. The IRS still has to choose returns based on their usual audit selection criteria. They don’t have resources to audit every amended return.

You’re more likely to get audited if the amended return shows a large increase in income or deductions that seem questionable. Significant changes in business income or expenses could also get attention.

The best protection is to file an accurate amended return with thorough documentation for any changes. Keep records proving your tax positions in case the IRS does select your amended return for audit.

When Does The IRS Start An Audit?

IRS audits typically happen soon after you file your return. Most audits cover returns filed within the last 2-3 years.

Returns are chosen based on IRS audit filters that flag returns with potential errors or questionable items. Mathematical mistakes, large charitable deductions, and business losses are common audit triggers.

Once your return is selected, you’ll receive a notice from the IRS explaining the audit process. This usually happens 3-6 months after filing, but could be longer.

Most IRS audits are done by mail. An IRS agent will send a letter asking for documentation to support items on your return.

In-person audits are less common. These involve meeting with an IRS agent at an IRS office to discuss your return. In-person audits usually focus on complex business returns.

No matter how the audit is conducted, respond to all IRS requests promptly. Provide complete, organized records to support the return items being examined. Move quickly to resolve audits so you limit potential penalties.

And remember – just because your return is chosen for audit doesn’t necessarily mean you did anything wrong! Many audits result in no changes at all.

What If I Disagree With Audit Changes?

You have the right to challenge audit changes you disagree with through the IRS appeals process. The appeals process gives you an independent review if you don’t think the audit findings are correct.

There are two ways to request an appeal:

  • Request reconsideration from the auditor. Discuss your concerns with the auditor when you receive the audit report. Provide additional documentation supporting your position. The auditor may agree to make changes.
  • File a formal appeal. If you can’t resolve the issue with the auditor, submit a formal protest requesting appeal to the IRS Appeals office. Outline why you disagree with the audit findings.

During the appeals process, you’ll have a hearing with an appeals officer. They will review your case and make a final determination.

You may need to pay disputed tax while your appeal is pending to stop interest and penalties from accumulating. If you win your appeal, you’ll get a refund of any overpayment.

Having a tax pro represent you can be extremely helpful if your audit results in an appeal. They understand the appeals process and can effectively argue your case.

Can I Go To Jail For Tax Evasion?

Willfully attempting to evade paying taxes is a felony that can result in fines up to $100,000 and imprisonment up to 5 years. But going to jail for tax evasion is rare.

Most tax evasion cases are settled through payment of back taxes, interest, and civil penalties. Prosecution usually only happens for extreme cases of tax fraud.

Factors that make criminal charges more likely include:

  • High dollar amounts of unpaid tax
  • Using complex schemes to intentionally evade tax
  • Repeated acts of evasion over multiple years
  • False statements made under oath during an audit
  • Identity theft or falsifying documents

Even if you underpaid your taxes by mistake, the IRS will seek payment of what you owe plus penalties. Intentional evasion is what triggers criminal prosecution.

The bottom line is if you made honest mistakes on your taxes, you have little to fear from the IRS. Voluntarily filing amended returns and paying any additional tax due is the best way to correct errors. This shows good faith and can minimize penalties.
However, there are limits on amending returns:
You generally only have 3 years to file an amended return and claim a refund. After that, the statute of limitations expires and you lose the ability to recover any overpayment

There is no time limit for amending returns where you underreported income. You can file an amended return reporting additional income even from many years ago

You cannot file an amended return once the IRS has started an audit for that year. You would need to work through the audit process

Amended returns may increase your risk of being audited, especially if they show a large change in taxable income

Frivolous amended returns, such as claiming you had zero wages, can lead to significant penalties

When amending returns:
Carefully follow the Form 1040X instructions and provide thorough explanations

Have documentation to support any changes you are making.
Pay any additional tax you owe promptly to minimize interest and penalties.
Correcting honest mistakes through amended returns is usually the best approach. But know the limits and be prepared for the IRS to review changes carefully. Consulting a tax professional can help ensure you handle amendments properly.

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