Made a Mistake on Your Taxes? A Guide To Fixing Errors and Avoiding Audits

You filed your income tax return for last year before the April 15th due date, only to later realize you made a mistake. Maybe you forgot to claim the earned income credit or opted for the standard deduction when you should have itemized. Whatever the case, a mistake on an income tax return you’ve already filed doesn’t have to be stressful. The Internal Revenue Service (IRS) has a specific form for correcting these situations. Millions of taxpayers use it to submit amended tax returns each year. Understanding what’s involved in the process can help you address the error sooner rather than later.

This guide reviews what happens when you make a tax mistake, the step-by-step process for fixing it, and how to avoid common errors that can lead to an IRS tax audit. If this gets complicated or you have concerns regarding your situation, consider speaking with a lawyer. A solid tax attorney who’s licensed in your state can help you understand your options.

In the meantime, let’s start with the potential consequences of an error.

What Happens When You Make a Tax Mistake?

The consequences of a tax mistake depend on the nature of the error. The IRS distinguishes between an honest mistake due to negligence and a deliberate attempt to deceive, which is considered fraud.

Negligence

In the context of tax filing, negligence refers to the failure to make a reasonable attempt to comply with tax laws or to exercise ordinary and reasonable care in preparing a tax return. If the IRS determines that a taxpayer’s underpayment was due to negligence, it can impose a 20% penalty on the underpayment. If the negligence was on the part of a tax professional, you may be able to avoid penalties since you didn’t prepare your own taxes. You’ll still be responsible for any additional taxes owed.

For those with a good history of tax compliance, the IRS may grant a first-time penalty abatement. If the IRS uncovers tax fraud, however, the criminal penalties are far more severe.

Tax Fraud

Tax fraud is far more serious an issue and requires the IRS to prove you acted with willful intent to deceive. The penalties are harsher and can include criminal charges. For simple, honest mistakes, the IRS is primarily concerned with collecting the correct tax, not pursuing fraud charges.

How To Fix a Tax Return Error

The primary tool for correcting a previously filed tax return is IRS Form 1040-X, Amended U.S. Individual Income Tax Return. Let’s review how and when taxpayers should use Form 1040-X.

When Should You File an Amended Return?

After you discover the error, keep a few considerations in mind about submitting an amended return. In general, you must file IRS Form 1040-X within the later of:

• Three years from the date you filed the original return
• Two years from the date you paid the tax

Unless you owe additional tax, wait to file your amendment until the IRS has received or processed your original return. If you owe more tax, filing sooner can help limit interest and penalties.

What Mistakes Can You Correct With Form 1040-X?

Filers can use the form for several types of common mistakes on their original tax return. These include:

• Expense, deduction, or credit error
• Wrong filing status
• Modification of dependents
• Incorrect taxable income

If you receive a corrected tax form like a W-2 or 1099 after you’ve filed your taxes, you can also use Form 1040-X to update the information you initially entered on your return. Errors that affect more than one tax year require separate amended returns for each year.

Notices and Processing

After you file your amended return, the IRS may take up to 20 weeks to process it. You should receive a series of IRS notices acknowledging receipt of your amendment and providing you with status updates.

Refunds/Payments

If your amendment results in a larger tax refund, the IRS will send you the additional money after processing your amended return. This includes discovering that you were entitled to a tax deduction or tax credit you didn’t claim. If this is the case, file an amended return. The IRS will refund the amount due after it has processed the return. Taxpayers who discover they were entitled to claim the child tax credit can file amended returns to claim it for prior tax years.

It can take as long as 20 weeks for the IRS to process an amended return, so it may be a while before you see your refund check. To track your amended return after it was filed, use the IRS’s Where’s My Amended Return webpage. Keep in mind that an amended return can take up to three weeks to show up in the IRS’s computer system.

For those who owe additional taxes, it’s advisable to satisfy the additional tax liability as soon as possible to avoid or lessen interest and penalties. If you don’t have the funds available to pay your tax bill in full when you file the amended return, you can work out a tax payment plan with the IRS.

Tax Preparation Software

You can usually e-file most amended returns. Maintaining electronic records of your taxes can make e-filing an amended return much easier. Tax software like TurboTax and others can help you prepare amended returns using your saved tax information from previous years.

Business Entities

Depending on company structure, a sole proprietorship can often use Form 1040-X. Partnerships amend returns by filing an IRS Form 1065-X, Amended Return or Administrative Adjustment Request. S corporations file an amended IRS Form 1120-S, U.S. Income Tax Return for an S Corporation and check the Amended Return box; and C corporations use IRS Form 1120-X, Amended U.S. Corporation Income Tax Return.

Impact of Amendments

Correction of certain errors may require your attention, such as when changes to your taxable income affect your tax bracket. Self-employed individuals may need to adjust Schedule SE if their amendment adjusts income, expenses, or both.

State Tax Returns

Amending your federal tax return might also mean changes to your state tax return. State rules for amendments can vary, so check with your state’s tax authority for guidance.

When Not To File an Amended Return

It’s not always a requirement to file an amended return to correct a mistake. In some cases, the IRS will already be aware of it, such as underreported income from your job. This error becomes obvious during processing because your reported income won’t match the amount your employer reported on your IRS Form W-2, Wage and Tax Statement. You must submit Form 1040-X or pay the deficit tax immediately to limit interest or penalties.

Let’s review several common scenarios where you don’t need to file an amended return:

• Math Errors: The IRS usually corrects simple math errors during processing. As such, you don’t need to file an amended return for these.
• Missing Forms/Schedules: If you forget to attach a required form or schedule, the IRS will typically request it from you. You don’t need to file Form 1040-X in this case.
• Corrections by the IRS: The IRS may have noted the error or discrepancy and already made changes to your return. If that’s the case, you don’t need to file an amended return for those corrections.
• Bank Account Changes: If you need to change the direct deposit information for your checking or savings account after filing, you won’t use Form 1040-X. Instead, contact the IRS directly.

If you report incorrect information for items like income, deductions, credits, dependents, or filing status, you’ll typically file an amendment.

How To Avoid Future Mistakes and Audits

There’s no guaranteed way to ensure you won’t face an IRS audit. Not committing several kinds of avoidable errors can keep it from becoming a certainty.

The IRS computer screening process uses algorithms to detect inconsistencies and unusual patterns in tax filings, which can trigger an audit. You can also be selected at random or because your return somehow involves other taxpayers under audit. Let’s examine some of the more common reasons the IRS may decide to audit your tax return.

Unreported Income

Taxpayers not reporting all of their taxable income is a common occurrence. Inaccurate reporting or underreporting of income on your tax return tends to heighten IRS scrutiny and increase your audit risk.

The IRS receives copies of your W-2 forms from employers and 1099 forms from other sources of income. It uses sophisticated data-matching technology to compare the income reported by employers, financial institutions, and other third parties with the details on your tax return. This includes any side jobs you may be working, even if they’re part-time.

To avoid this common pitfall:

• Keep track of all your income sources throughout the tax year
• Wait until you have all your tax forms before filing your return
• Double-check that the income you report matches what’s on your W-2s and 1099s

Don’t forget to include income from side jobs, freelance work, and the gig economy.

Math Errors

Math mistakes are a red flag with the IRS and raise concerns about the accuracy of your tax return. Simple mistakes in addition, subtraction, or more complex calculations can prompt the IRS to take a closer look.

This is especially true if they significantly affect your reported gross income or deductions. Even though you may use tax software that does the calculations, errors can still occur when entering numbers.

To ensure this doesn’t happen:

• Double-check all the numbers you enter into tax software or forms
• Use a calculator to verify your calculations if you’re doing your taxes by hand
• Take your time and don’t rush through the process

While not all math errors result in audits, they can lead to further scrutiny. ​

Excessively Large or Numerous Deductions

Deductions can help lower your tax liability, but claiming too many or unusually large deductions for your income level can attract the IRS’ attention. This includes home office deductions and charitable donations. While you should claim all legitimate deductions, they need to be reasonable and well documented.

To steer clear of red flags:

• Keep careful records of all deductible expenses
• Only write off legitimate expenses you can support with documentation
• If you have unusually large charitable contributions, medical expenses, or other deductions, be prepared to explain and prove them
• Consider spreading large deductions over multiple years if possible and allowed
• Be especially careful with vehicle, entertainment, and home office deductions

If you have a business loss, make sure you can prove you’re trying to make a profit.

Business Expense Errors

If you’re self-employed or a small business owner, it’s important to accurately report your business income and expenses. The IRS pays close attention to business tax returns, especially those with a lot of cash transactions.

Most self-employed individuals must also pay self-employment tax to cover Social Security and Medicare taxes. Failing to do so or improperly reporting business income or expenses can raise questions.

To avoid IRS scrutiny:

• Keep detailed records of supporting documentation
• Don’t mix personal and business expenses
• Don’t underreport your business income
• Only claim legitimate business expenses

Make sure you report business income and expenses on a Schedule C.

Foreign Income Omissions

Foreign income and accounts can trigger IRS audits due to strict reporting requirements. Taxpayers must report worldwide income, including wages, interest, dividends, and rental income on designated forms. Discrepancies or omissions in reporting foreign income can prompt unwanted scrutiny.

To minimize heightened scrutiny:

• Report all foreign bank accounts on your tax return
• Ensure you’re filing the proper IRS form(s) for your foreign assets/income
• Disclose all types of foreign income

The IRS uses data from foreign financial institutions to identify unreported income.

Claiming Children Incorrectly

The rules for claiming children as dependents can be complex, especially in cases of divorce or shared custody. Taxpayers often erroneously claim children who don’t qualify as dependents or were claimed by another taxpayer. Either can trigger an audit.

To avoid these mistakes:

• Ensure you or your tax pro understands the requirements for dependents
• Only claim children who qualify as your dependents

It’s a good idea to coordinate with ex-spouses or others to ensure children aren’t claimed twice.

Erroneous Earned Income Tax Credit Claims

The Earned Income Tax Credit (EITC) is a valuable credit for low- to moderate-income earners. The IRS closely scrutinizes EITC claims, as they are often claimed incorrectly.

To avoid incorrect EITC claims:

• Make sure you meet the requirements for the EITC
• Double-check your income and the number of qualifying children

You may also want to utilize the IRS EITC Assistant tool for verification.​

Rounding Numbers

While it might seem harmless to round numbers on your tax return, the IRS prefers exact figures. Too many rounded numbers can make your return look suspicious and prompt an audit.

To reduce those chances:

• Use exact numbers from your tax forms and receipts
• Keep detailed records to support your numbers

If you must estimate a figure, make it clear that it’s an estimate.

Filing Late or Not Filing at All

Even if you can’t pay the taxes you owe for the last year, file your return by the deadline (usually April 15). Not filing on time or at all is a red flag that can set off an IRS audit, especially if a taxpayer has a history of non-compliance.

Instead of taking that risk:

• File on time whether you owe money or expect a tax refund
• If you need more time to file the return, file for an extension
• Pay any estimated taxes owed by the original deadline (even with an extension)

The IRS allows various arrangements for satisfaction of taxes owed, but they all require communication with the IRS.

Improper Categorization of Itemized Expenses

If you itemize deductions, be precise and honest. Misclassified expenses may raise suspicion that you’re trying to reduce your taxable income improperly or that other parts of your return are also inaccurate. As such, these improper categorizations may trigger an audit.

To keep the scrutiny at bay:

• Keep detailed records of all expenses throughout the year
• Use clear, specific categories for your deductions that comply with IRS guidelines

Consider using accounting software or a tax professional like a CPA to help organize your expenses.

Getting Legal Advice

If you’re aware of an error on a return you’ve already filed, you have options. One is to file an amended return. This may be your best course of action for fixing tax issues before they become tax problems.

Consider speaking with an experienced tax attorney in your state if you’re uncertain. You can share the specifics of your situation with them, enjoying a higher level of confidentiality than with other tax professionals. They also tend to be skilled at negotiating with the IRS and can potentially secure a more favorable outcome now or with tax tips for the future.

Findlaw’s directory of dedicated tax attorneys can make finding the right advocate manageable. Just click on your state to view contact information and reviews for local experts. You can also narrow your search results by city. Ensure you’re making informed decisions by consulting with a local professional about your tax concerns.