Is There a Penalty for an Amended Tax Return?

Filing Form 1040-X, an amended tax return, is the proper procedure for correcting errors on a previously filed return. The act of filing does not trigger a penalty. Instead, penalties are linked to the reason for the amendment. If the correction results in a higher tax liability, you may face penalties and interest for not paying the correct amount of tax by the original due date.

Potential Penalies for Underpayment

If an amended return shows you owe more tax, the Internal Revenue Service (IRS) may assess penalties on the unpaid balance. The specific penalties depend on the nature of the error and the amount of the underpayment. You do not calculate these penalties on Form 1040-X; the IRS will calculate any applicable penalties and send you a separate notice.

A common charge is the failure-to-pay penalty, which applies to any tax not paid by the original filing deadline. The penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains outstanding. This penalty accrues from the original due date and is capped at 25% of the total unpaid tax.

The accuracy-related penalty may apply if the underpayment was due to specific reasons. This penalty is 20% of the underpayment portion caused by the error. The two primary triggers are negligence or disregard of tax rules and a substantial understatement of income tax. Negligence is failing to make a reasonable attempt to comply with tax laws, while disregard includes carelessly or intentionally ignoring the rules.

A substantial understatement of income tax occurs if the understated tax exceeds a specific threshold. For individuals, this is an understatement of more than 10% of the correct tax or $5,000, whichever is greater. For example, if your correct tax was $20,000 but you paid $14,000, the $6,000 understatement is greater than both $5,000 and the 10% threshold ($2,000). This would trigger the 20% penalty on the $6,000 underpayment.

Interest on Additional Tax Owed

Separate from penalties, the IRS charges interest on any tax not paid by its original due date. This interest applies to the additional tax on your amended return and accrues from the original due date, not the filing date of the amendment. Because of this, interest will have already accumulated even if you file and pay immediately.

The interest rate fluctuates, as it is determined quarterly. IRS interest also compounds daily, meaning interest is calculated each day on the outstanding tax, penalties, and previously accrued interest. This daily compounding can cause the total amount owed to grow rapidly.

Unlike some penalties, interest charged by the IRS cannot be waived or abated for reasonable cause. Interest serves as compensation to the government for the time it was deprived of the funds it was owed. The charge stops accumulating only when the tax, penalties, and all accrued interest are paid in full.

Requesting Penalty Removal

If the IRS assesses penalties on the tax from your amended return, you may be able to have them removed through a process called penalty abatement. While interest charges cannot be abated, penalties like the failure-to-pay and accuracy-related penalties may be waived if you meet specific criteria. This relief is not automatic and must be formally requested.

The most common basis for penalty removal is demonstrating “reasonable cause.” This requires showing you exercised ordinary business care in trying to meet your tax obligations but were unable to due to circumstances beyond your control. Valid reasons include the death or serious illness of you or an immediate family member, unavoidable absence, or destruction of your records. Relying on erroneous advice from a competent tax professional can also be a valid reason.

Another option is the First-Time Penalty Abatement (FTA) program for taxpayers with a clean compliance history. To qualify, you must have filed all required returns for the past three years without incurring penalties. This waiver can remove the failure-to-file and failure-to-pay penalties. To request abatement, you can attach a written statement to your Form 1040-X or file Form 843, Claim for Refund and Request for Abatement, after the IRS assesses the penalty.

Amending a Return for a Tax Refund

If your amended return shows you are entitled to a tax refund, the situation is different. Since you did not underpay your tax, the failure-to-pay and accuracy-related penalties do not apply. The main concern when amending for a refund is the filing deadline.

The IRS imposes a statute of limitations on refund claims. You must file Form 1040-X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later. For a return filed by the April deadline, the three-year period starts from that due date.

If you fail to file your amended return within this timeframe, you will lose your right to the refund. The IRS cannot issue a refund for a claim filed after the statute of limitations has expired. It is best to review past returns for errors and file amendments to claim a refund before the deadline passes.