Did You Make a Tax Mistake?

The April 18th tax filing deadline is finally in the rearview mirror. Now you might be sitting back, waiting for that refund check to hit your account – or trying not to think about that big one you had to write. Then, all of sudden, you realize you made a tax mistake.

Maybe it was a simple tax mistake: you made a typo or a math error or forgot to report some income. What happens now? Will you get audited?

Triple and quadruple checking your tax returns will save you a world of hassle.

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.

Checking the Numbers

Before you pay up, make sure the IRS recalculation is correct. Maybe the difference relates to a stock sale and the IRS has recalculated your tax liability assuming the proceeds of the sale were 100% capital gains. Your basis in the security is not always reported to the IRS. In that case, 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 plus an explanation for why your original return was prepared incorrectly and why you disagree with their recalculation. If this all goes smoothly, you’ll get another letter from the IRS confirming they’ve accepted your amended return.

The Good News?

If you agree with their recalculation, pay the difference you owe, plus the interest and penalties they’ve calculated for you, and it’s all over. Chances are slim 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.

..And The Bad News

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 abused pretty often. Additionally, you are 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 or 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 gotten a notice. You may ask, “But how will the IRS find out? Maybe I should just wait and see.”

This is not a good idea. If the IRS discovers the error and you owe more tax than you paid, you will have to pay the tax you owe plus interest and the dreaded failure-to-pay penalty. The sooner you file the amended return and pay what you owe, the less interest and penalties you will need to cover.

In the long run, it’s better to just file the amended return and pay the amount, if only to ease your mind and worrying about a loud knock on your door for the next six years.

Having a trusted CPA and tax professional like Williams & Kunkel CPAs can help catch any problems before they snowball. Call us today in Flower Mound at 972-446-1040 to have a chat.

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Source: Forbes