Adjustment for Federal Tax After Taxes Have Been Filed
If you make an error on your tax return, you may file an amended return, or the IRS may correct the error for you. If your error resulted in an underpayment, penalties and interest will accrue. If it resulted in overpayment, you are probably entitled to a refund. Sometimes -- for example, to take advantage of retroactive tax breaks caused by changes in tax law -- you may even have to amend an error-free tax return.
When You Need to File an Amended Return
You need to file an amended return if you discover an error, other than a math error, that changes your tax liability. You should also file an amended return if a retroactive change in tax law entitles you to a refund by lowering your tax liability for the year in question. The IRS will fix any math errors for you and will notify you if you underpaid or overpaid your taxes. You don't need to file an amended tax return if you forgot to include W-2 forms or schedules, because the IRS will request these from you after it discovers them missing.
To amend your tax return, you must file IRS Form 1040X, Amended U.S. Individual Income Tax Return. Form 1040X requires you to list the original and amended values of every item on your original Form 1040 that you are amending, and to provide an explanation for your amendments. You must file a separate Form 1040X for each tax return you are amending, and you cannot file Form 1040X electronically.
If you underpaid your taxes, you are entitled to a refund as long as you claim it within the statute of limitations -- two years after you filed the original return. If you are claiming an additional refund, wait until you receive your first refund before filing Form 1040X. You won't be penalized for the delay, because IRS penalties are based on a percentage of the amount you owe -- if you owe nothing, there's no penalty.
If you underpaid your taxes, penalties and interest will begin to accrue on the day after the due date and will continue to accrue whether you file Form 1040X or not. Nevertheless, you may save money by filing Form 1040X as soon as possible, even if you can't pay right away. This is because the IRS imposes two penalties -- one for the the failure to file and another for the failure to pay -- and the failure-to-file penalty is higher.
Penalty and Interest Amounts
The failure-to-file penalty amounts to 5 percent if the amount due for each month or part of the month that you don't file on time; the failure-to-pay penalty is only 0.5 percent per month. Both penalties top out at 25 percent of the amount due. The failure-to-file penalty is offset by the failure-to-pay penalty such that, absent fraud, your maximum penalty is 47.5 percent. If your return is 60 days or more late, however, a minimum penalty applies -- $135 or 100 percent of the amount due, whichever is less. There is no upper limit on interest liability.
If you find yourself unable to pay your adjusted income tax liability, you can seek compromise with the IRS. You may, for example, seek to pay in installments, although penalties and interest will continue to pile up during the repayment period. You may also make an "offer in compromise," which is an offer to settle for less than the amount the IRS says you owe. The IRS generally grants installment payment requests, but is unlikely to approve an offer in compromise unless it concludes that it made an error in calculating your tax liability or that you will never be able to pay the tax.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.