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Tax guide
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Tax Guide
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Make a mistake? You can make amends

Although an amended return will make the IRS sit up and take notice, if you do it right, your chances of being audited may actually decrease.

I know you were careful. You did the math. Your tax preparer did the math. You double-checked HIS math. But sometimes, no matter how hard you look at a figure, that error you just made -- or that your preparer just made -- doesn't register in your mind.

This is not the end of the world. When a mistake is made on your tax return, correct it! The error may be in your favor, or in favor of the IRS. But in any case, correct it. It may be due to a missed deduction, an incorrect interpretation of the law or facts, or simply by a late or corrected W-2 or 1099.

Fortunately, the IRS recognizes that your tax return may need to be corrected and actually has drafted a specific form for that purpose: the 1040X. Form 1040X is an easy form to complete. It has three columns: one for what you originally reported, one for the changes in the numbers and a third for the final, corrected numbers. On the back you explain the reason for the change, such as you received a late 1099, or there was a missed deduction, you found additional charitable contributions, and so on.

If the change is due to a corrected 1099 or other third-party document, attach a copy to your return. If the change is due to a deduction you missed, attach a copy of the receipt for the additional deduction to the return. While not necessary, I suggest you try to attach documentation to "prove" your change.

What I'm trying to do here is minimize your chances of getting audited. The very fact that you filed an amended return will not, in and of itself, increase your chance of being audited. However, what you change and the magnitude of that change might trigger an audit. By its very nature, an amended return demands extra scrutiny by the IRS. An agency representative must call up your old return and compare the changes with the new return. That gives the IRS twice as many chances to see something that concerns an agent.

Prove those deductions

That's why I recommend attaching substantiation for the changes on your Form 1040X. If the change, for example, is a huge charitable contribution missed on your original return, the IRS computer will pop out your return for human review. That's where your attached substantiation should dissolve any audit questions, because you've already "proved" your deduction.

In fact, by attaching substantiation of the change to your amended return, you have shown the reviewing agent that you know the rules, and actually would be a poor audit risk. You may have actually decreased your chances of a full audit.

When can you amend your return? The normal statute of limitations for a tax return is three years. That means that you have three years from the due date of your return to amend your returns.

For example, your 1999 individual tax return should have been filed by April 15, 2000. After April 15, 2003, you will no longer be able to amend that return. If you found a mistake on your 1998 return, I'm sorry. The original filing deadline was April 15, 1999. You should have filed your amended return on April 15, 2002.

This statute of limitations is really important if you are due a refund and haven't yet filed your return for the current year. Some people, if they think they're due a refund, take the easy route and procrastinate. They know they don't owe any additional tax, and therefore figure there's no rush in getting that return out to the IRS. They're wrong.

Use refund or lose It

If you don't file your tax return, and you're owed money, the statute of limitations never even starts to run. You just don't qualify. But if you are due a refund, the statute of limitations begins running on April 15 of the year it's due. So let's look at your 1998 return and the money you didn't yet claim. Here's the bad news. If you didn't file your 1998 tax return by April 15 2002, your refund is gone, disappeared into the U.S. Treasury. So if you have a similar problem with your 1999 return, get it in by April 15, 2003.

Everyone -- even the government -- will agree that you overpaid and that the IRS should have sent you your refund. But they won't, and, under the law, you can't make them. In fact, you can't even use that "refund" to offset taxes for future years; it's lost forever.

That's the nature of the statute of limitations. It limits the time both you and the IRS have to make changes. The IRS has actually publicized the fact that it's holding billions of dollars in unclaimed taxes.

If you haven't filed . . . file! There are penalties for not filing separate from the issue of whether you owe any money. If you have filed and received a corrected or late 1099, file an amended return. The IRS computers are going to be looking for those corrected numbers.

Alternatively, if you found out that you missed a deduction or a credit two years ago, file an amended return. And make sure they give you the interest owed for holding your money. (Unfortunately, that interest will be taxable.)

By Jeff Schnepper
MSN.Money (April, 2003)