What Happens If I Get My Taxes Wrong?

Mistakes can occur when filing taxes. Understanding the implications of errors on your tax return is important for managing potential consequences. This article explores different types of tax errors, how tax authorities identify them, the penalties and interest that may arise, and how to correct your return if you discover a mistake.

Understanding Different Types of Tax Errors

Tax errors vary, and tax authorities distinguish between them when determining consequences. An honest mistake refers to an unintentional miscalculation or oversight. This could include a simple arithmetic error, forgetting to include a minor income source, or misplacing a deduction or credit form. Such errors are not viewed as an attempt to avoid tax obligations.

Negligence involves a lack of reasonable care or a disregard for tax rules and regulations. This might manifest as failing to keep adequate records, not making a reasonable attempt to comply with the Internal Revenue Code, or carelessly overlooking reporting requirements. While not necessarily intentional fraud, negligence indicates a failure to exercise reasonable diligence in preparing a tax return.

Tax fraud or evasion represents the most serious type of error, characterized by the intentional misrepresentation or omission of information to avoid tax liability. This includes deliberately hiding income, claiming fictitious deductions, or knowingly providing false information. The distinction between these types of errors is important because the consequences, including the severity of penalties, directly relate to the taxpayer’s intent.

How the IRS Identifies Issues

The Internal Revenue Service (IRS) employs several methods to identify errors on tax returns. A primary method is information matching, comparing reported income and deductions with third-party information. These include forms like:

• W-2s from employers
• 1099s for various types of income (e.g., interest, dividends, independent contractor payments)
• K-1s from partnerships or S corporations
• 1098s for mortgage interest

Discrepancies flagged by information matching often lead to IRS notices, such as a CP2000 notice. This notice indicates a mismatch between what you reported and what third parties reported to the IRS. It provides an opportunity for you to agree with the proposed changes, explain the discrepancy, or provide additional documentation.

Beyond automated matching, the IRS conducts audits to examine tax returns. Audits can range from correspondence audits, conducted entirely by mail, to office audits, where you meet with an IRS agent at a local office, or field audits, which take place at your home or business. Triggers for an audit can include unusually high deductions compared to income, complex returns with many deductions or credits, or even random selection as part of the IRS’s enforcement initiatives.

Penalties and Interest for Errors

Financial consequences can arise from tax errors, depending on the nature and severity of the mistake. A failure to file penalty applies if you do not submit your tax return by the due date or extended due date, unless you can show reasonable cause. This penalty is 5% of the unpaid tax for each month or part of a month the return is late, capped at 25% of your unpaid taxes. If your return is more than 60 days late, a minimum penalty applies.

A failure to pay penalty is imposed if you do not pay the tax shown on your return by the due date. This penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25% of your unpaid taxes.

Accuracy-related penalties, under Internal Revenue Code Section 6662, can be assessed for negligence or substantial understatement of income tax. This penalty is 20% of the portion of the underpayment attributable to such errors. A substantial understatement occurs if the understatement of tax exceeds the greater of 10% of the tax required to be shown on the return or $5,000. For intentional misrepresentation or tax fraud, a civil fraud penalty of 75% of the underpayment attributable to fraud applies. This penalty applies only when a return has been filed and an underpayment exists due to fraudulent intent.

Interest also accrues on underpayments from the original due date of the return until the tax is paid in full. The interest rate on underpayments is determined quarterly and is the federal short-term rate plus three percentage points. This interest compounds daily, adding to the total amount owed.

Correcting Your Tax Return

If you discover an error on a previously filed tax return, you can correct it by filing an amended return. Form 1040-X, U.S. Amended Individual Income Tax Return, is the specific form used for this purpose. This form allows you to adjust income, deductions, credits, or filing status that were incorrect on your original return.

You have a specific timeframe to file an amended return to claim a refund. This period is within three years from the date you filed your original return or within two years from the date you paid the tax, whichever date is later. If you filed your original return before the due date, it is considered filed on the due date for the purpose of this three-year period.

To complete Form 1040-X, you will need your original tax return for the year you are amending, along with any new or corrected supporting documentation, such as updated W-2s or 1099s. The form requires you to show original, changed, and corrected amounts. You must also provide a clear explanation for the changes you are making.

While some tax software allows for e-filing of Form 1040-X for recent tax years, you may need to print and mail the completed form with any revised schedules or forms for older tax years. Proactively correcting errors can help you avoid or reduce potential penalties and interest, as the IRS may consider prompt action as a sign of good faith. You can track the status of your amended return using the “Where’s My Amended Return?” tool on the IRS website, though processing can take several weeks.