Oops, I Screwed Up! How to File an Amended Return

Say you just figured out you screwed up your 2008 Form 1040, which was filed only a month or two ago. Or maybe you missed some tax-saving deductions or credits on your 2007 return, which was filed last year. Don’t feel bad. With today’s ultra-complicated tax rules, anyone can make a mistake. Now you can fix it (whether it’s in your favor or not) by filing an amended return on Form 1040X (Amended U.S. Individual Income Tax Return). While this might sound like a daunting task, it’s actually pretty easy in most cases. Here’s what you need to know.

If You Are Due a Refund

If amending your return will produce a tax refund, the deadline for filing Form 1040X is generally three years after the original return for the year in question was filed. If you filed your original Form 1040 before the April 15 deadline (or before Oct. 15 if you got an extension), you’re considered to have filed it on the deadline for purposes of the three-year rule.

For example, say you filed your 2007 Form 1040 on April 15, 2008, and paid the tax due on that date. You now realize you should have itemized deductions instead of taking the standard deduction. You have until April 15, 2011, to file an amended return to claim your refund. The same deadline applies if you filed your 2007 return on March 15, 2008, or Feb. 15, 2008.

Bottom Line: Naturally, the sooner you file the amended return, the sooner you’ll get your refund.

If You Need to Pay Additional Tax

This is a trickier situation. If you now realize you understated your tax liability on the original Form 1040, you’re expected to file an amended return and pay the additional tax. If you don’t and the IRS discovers the error, the government will bill you for the unpaid tax plus interest (currently at a 4% rate) and levy a failure-to-pay interest charge penalty (at a 6% rate). Depending on the nature and size of the error, you might get dinged with other penalties, too. But the IRS can waive those penalties if you show you had a reasonable cause for the underpayment. For example, you might have reasonable cause if you relied on incorrect advice from a paid tax professional, experienced a defect in a tax preparation software product or received inaccurate information (like an erroneous Schedule K-1 from a partnership).

The sooner you file an amended return and pay the tax, the sooner you’ll stop racking up interest and the failure-to-pay penalty.

While you probably know the IRS doesn’t audit very many returns these days, you’re highly likely to get caught if your Form 1040 omitted income that was automatically reported to the Feds on an information return (such as a Form W-2 or Form 1099). Be warned: The IRS generally has three years after the date the original return was filed to discover errors and omissions and assess additional tax, interest, and penalties. This is the so-called three-year statute of limitations rule. However, a six-year window applies if the original return understated gross income by over 25%. And there’s no statute of limitations on a fraudulent return.

Bottom Line: If the original return understated your tax bill by only a small amount, you should probably file Form 1040X and pay the Feds if for no other reason than to clear your conscience. But, if there was a large understatement, this is a can of worms you don’t want to open before understanding all the consequences (including the possibility that your friendly state tax collector may step in). Consider hiring a tax pro with experience in dealing with past-due tax problems. Hopefully, you can get off the hook with minimal penalties. In any case, be prepared to pay the past-due tax plus interest.

Whether applying for a refund or paying back taxes, filling out the actual 1040X form is usually pretty easy if you take your time and carefully follow the instructions. The form is only two pages long.

For example, let’s assume the reason you want to file a 1040X is simply to claim a refund because you overlooked a write-off or failed to claim a credit. Basically, you put the original deduction or credit amount in column A on page 1, any change to the original amount in column B, and the corrected amount in column C. You then explain each change in the space on page 2.

Make sure to use the current version of Form 1040X, which you can print out from the IRS website at www.irs.gov (click on Forms and Publications). If you need to attach corrected or additional tax forms, be sure to use the forms for the year you’re amending. For example, if you’re filing Form 1040X to claim additional itemized deductions for 2007, you’ll need to attach a corrected 2007 version of Schedule A. The IRS web site has prior-year tax forms, too (click on Forms and Publications; then click on Previous Years).