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 red flag you. What you report on that amended return, however, can red flag you for an audit.
Reasons to File Form 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. Whether your return isn't entirely accurate because you forgot to take a deduction or credit, took one that you later found out you aren't eligible for, need to change your filing status and standard deduction or left out some income that's taxable, for example, you can use the 1040X to make the corrections.
Refund and Audit Time Limits
When filing the 1040X decreases the tax originally reported, meaning you're due an additional refund after, you only have three years from the time you filed the first return to get the 1040X to the IRS and claim it. This three-year period starts on the original filing deadline -- which for most individuals is April 15 -- 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.
Red Flags for All Returns
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 is to get red flagged and potentially be selected for an audit. This doesn't mean your original or amended return is incorrect; it means 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.
Selected for Audit
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.