The April 18th tax filing deadline is behind us. Your taxes are filed and now you’re sitting back waiting for that refund check to hit your account - or trying not to think about that big check you had to write. Then you realize you messed up.
Maybe it was a simple mistake: you made a typo or a math error or forgot to report some income. Maybe you receive a corrected 1099 in the mail after filing your return. Either way, the tax return you just filed is wrong. What happens now? Will you get audited?
If the error relates to a form such as a W-2 or 1099, you will probably receive a Notice CP2000. This means that the income reported to the IRS does not match the information you reported on your tax return. The IRS will generally recalculate the amount of tax you owe and send you a bill for the difference.
Before you pay the bill, make sure the IRS recalculation is correct. Perhaps the difference relates to a stock sale and the IRS has recalculated you tax liability assuming the proceeds of the sale were 100% capital gains. Your basis in the security is not always reported to the IRS and they won’t ask whether you sold the stock at a gain or loss.
If you did make a mistake, but the IRS calculation is incorrect, you will need to amend your return. Prepare a Form 1040X Amended Return and send it to the IRS along with a copy of the notice, and an explanation of why your original return was prepared incorrectly and why you disagree with their recalculation of your tax liability. If all goes well, you’ll receive another letter from the IRS confirming they’ve accepted your amended return.
If you agree with their recalculation, pay the difference owed, plus the interest and penalties they’ve calculated for you, and you are done.
It’s unlikely that a small error will lead to an IRS audit, especially if you take steps to correct the error, and make good on the tax owed. According to the IRS Data Book 2014, during the fiscal year 2014, the IRS audited tax returns of about $1.2 million individuals, which is nearly 12% less than the previous year and the lowest number since FY 2005. The overall audit rate for individual taxpayers who did not include a Schedule C (Profit or Loss From Business) with their returns was only 0.9%. Budget cuts and more resources going to FACTA and Affordable Care Act implementation and identity theft issues have forced the IRS to redirect funding away from enforcement (i.e. audits).
Of course, there are a few situations that can trigger an audit. Claiming the Earned Income Tax Credit (EITC) raises the odds of being audited because the refundable credit has been prone to abuse. You are also more likely to get audited as your income goes up. Individuals with total income between $200,000 and $1 million were audited at a rate of 2.2% and individuals with income of $1 million and more were audited at a 7.5% rate.
If your error doesn’t relate to an item that is reported to the IRS, such as a business or medical expenses, you should amend your return, even if you haven’t received a notice. You may ask, “But how will the IRS find out? Maybe I should just wait and see.”
Bad idea. If the IRS does discover the error and you owe more tax than you paid, you will have to pay the tax you owe plus interest and the failure-to-pay penalty. The sooner you file the amended return and pay the tax due, the sooner you’ll stop racking up interest and penalties.
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. However, a longer six-year statute of limitations rule applies if the original return understated gross income by more than 25%. There is no statute of limitations on a fraudulent return.
In short, just file the amended return and pay the amount owed, if only to clear your conscience and avoid looking over your shoulder for the next three to six years.
