The Internal Revenue Service doesn't use audits to penalize you for amending taxes you filed but later realize included mistakes or omissions, even if the result is a lower tax bill. As long as you're honest (which doesn't mean your returns must be flawless) you shouldn't fear that amending your taxes on Form 1040X will create a red flag. So will an amended return trigger an audit? Not in and of itself; however, just like any tax return, the information on the form may cause the IRS to take a second look.
Amended Returns are Not IRS Audit Triggers
The IRS uses the Discriminate Inventory Function System, a sophisticated computer program, to check a majority of the returns it receives. This system compares items reported on your return to the returns of similar taxpayers and then assigns a DIF score to it. The higher your score, the more likely your return will be flagged and potentially be selected for an audit. This doesn't mean your original or amended return is incorrect; IRS red flags often simply mean something on the return is outside the “normal” range. Rest assured, however, that an audit won't commence until an actual human being at the agency reviews your return to determine if the high DIF score actually warrants an audit.
Why You Might Amend a Tax Return
You file your taxes initially on a Form 1040; when you want to amend them, you file a 1040X. You can think of Form 1040X as a way to voluntarily correct one or more items reported on a filed return, which may even prevent a potential audit if the IRS discovered the error on its own. Your return may not be entirely accurate if you forgot to take a deduction or credit, if you took a deduction or credit but later discovered you weren't eligible, if need to change your filing status and standard deduction or if you left out some income that's taxable. In these situations, you can use the 1040X to make the corrections.
Time Limits on Audits and Refunds
When your Form 1040X shows that you actually owe less tax than you paid under your original return, you may realize you're due an additional refund. Be mindful, though, that you only have three years from the time you filed the first return to get the 1040X to the IRS and claim that money. This three-year period starts on the original filing deadline – which is in mid-April – as long as you filed it on or before that date; otherwise, the statutory period begins on the actual date of filing. If you paid some or all of the tax for the year you wish to amend after filing the return, you may instead want to use the two-year time limit – which starts on the day after the tax payment is made – if it gives you more time to file the 1040X.
In most cases, the IRS is limited to the same three-year period you have for amending your taxes to audit the original return, but once you amend it, the agency gets an additional three years to audit the amended return. For example, if you filed your 2017 tax return on April 1, 2018, the IRS generally has until April 1, 2021 to flag the return for audit. However, if you amend your 2017 tax return in January 2019, the clock for the IRS starts over again and the three-year period ends in January 2022.
The Auditing Process
Even if you receive notice that your 1040X is up for audit, it doesn't always mean you're going to have to pay. Many audits are disposed of quickly and painlessly through the mail. For example, the auditor may simply request a receipt for a higher-than-average charitable deduction that you can mail back. A small percentage of audits do, however, require face-to-face meetings with an IRS auditor when a substantial amount of tax revenue is at stake.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.