It depends on whether you owe more tax or have an additional refund coming.
There are three circumstances under which you should definitely file an amended return: if you filed using an incorrect filing status; if you incorrectly reported your total income, or if you made an error in computing your deductions or credits. Changes in any of these areas should be reported to the IRS on Form 1040X, Amended U.S. Individual Income Tax Return.
The general rule is that if you will owe additional money, you should file an amended return as soon as possible. The IRS usually finds out about unreported income and will eventually take steps to collect any additional tax you owe, along with penalties and interest. If the mistake is due to the omission or correction of W-2s, 1099s, Schedule K-1s, or other income statements, the IRS will usually notify you to supply the missing forms or schedules because they receive copies of all statements of taxable income that are issued to you. The resulting tax liability, in most cases, may result in penalties and interest since the required tax was not paid by the due date. If you file an amended return claiming the income and pay any additional tax before the IRS catches the mistake, you should not be assessed almost as much in penalties.
Amended or omitted K-1 forms that report passive income or losses should almost always initiate you to file an amended return. Even though it may not change your tax liability for the year amended, it properly calculates and carries forward your passive loss carryover. This carryover could affect your cost basis in this investment in future years.
Most often, returns should be amended because deductions and credits were omitted that you are entitled to, yet neglected to include. However, you may want to weigh the cost if your potential refund is small. Your tax preparer will charge you to amend the return. Amended returns cannot be filed electronically, so your cost is often greater because of the paperwork involved.
If you determine your refund is worth the cost of amending, you have until three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later to amend the return. Wait until you have received and cashed the original refund check before filing your amended return to claim your additional refund.
If you notice a mistake in your return as a result of a math error, don’t worry, as the IRS will correct those errors and adjust the tax due accordingly. If you are due an additional refund, they will add it to your check. If you owe additional funds, they will bill you.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.