What Happens If You Make a Mistake on Your Taxes?

Making a mistake on your taxes is common and can be addressed. Tax laws and regulations are complex, and even with careful preparation, errors can arise on a filed return. The Internal Revenue Service (IRS) provides clear processes for taxpayers to correct these inaccuracies and maintain compliance. Promptly addressing any tax error prevents complications.

Discovering a Tax Error

Taxpayers discover errors through self-discovery or communication from the IRS. Self-discovery occurs after filing, often when reviewing financial records or finding overlooked documents. This might involve unreported income, forgotten deductions, or an incorrect filing status.

The IRS identifies discrepancies on filed returns. Their computer systems match information reported by employers and financial institutions, such as W-2s and 1099s, against what taxpayers report on their returns. If there’s a mismatch in income, deductions, or credits, the IRS may flag the return for review. These automated checks catch mathematical errors, incorrect Social Security numbers, or inconsistent dependent information. If an error is detected, the IRS sends a notice to the taxpayer.

Amending Your Tax Return

Correcting an error on a previously filed individual income tax return involves Form 1040-X, Amended U.S. Individual Income Tax Return. This form allows taxpayers to adjust income, deductions, credits, or even a filing status. Before beginning, gather a copy of the original tax return, any new or corrected tax forms like W-2s or 1099s, updated financial statements, and any IRS notices received.

To complete Form 1040-X, enter original figures in Column A, corrected figures in Column C, and the net difference in Column B. Provide an explanation for each change in the “Explanation of Changes” section. The form also requires basic identifying information such as your name, Social Security Number, and the tax year being amended.

Once Form 1040-X is completed, it can be submitted electronically for the current and two prior tax periods using tax filing software. However, paper filing remains an option and is necessary for certain situations or older tax years. If mailing, the correct IRS address depends on your state of residence and whether a payment is enclosed. It is advised to mail each amended return in a separate envelope if amending multiple years. After submission, taxpayers can check the status of their amended return online using the “Where’s My Amended Return?” tool or by phone, three weeks after filing. Processing times for amended returns vary, taking 8 to 12 weeks, and may extend up to 16 weeks.

Understanding Penalties and Interest

Tax errors can lead to financial consequences in the form of interest and penalties. Interest is charged on any underpayment of tax from the original due date until paid in full. The IRS sets this interest rate quarterly, and it is the federal short-term rate plus three percentage points, compounding daily. For individuals, this rate is around 7% per year.

Penalties apply depending on the nature and severity of the error. A Failure to File Penalty is assessed if a return is not filed by the due date, including extensions. This penalty is 5% of the unpaid taxes for each month or part of a month the return is late, capped at 25% of the unpaid tax. If the return is more than 60 days late, a minimum penalty of the lesser of $510 (for 2025 returns) or 100% of the tax owed applies.

The Failure to Pay Penalty applies if the tax owed is not paid by the due date. This penalty is 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid, up to a maximum of 25% of the unpaid taxes. If both failure to file and failure to pay penalties apply in the same month, the failure to file penalty is reduced by the amount of the failure to pay penalty, ensuring the combined penalty does not exceed 5% per month.

An Accuracy-Related Penalty is imposed for underpayments due to negligence or a substantial understatement of income tax. This penalty is 20% of the portion of the underpayment attributable to these issues. For individuals, a substantial understatement occurs if the underpayment exceeds 10% of the tax required or $5,000, whichever is greater. In cases of gross valuation misstatements, the penalty can increase to 40%. Penalties are applied to the tax first, then any penalty, and finally to interest.

Responding to IRS Notices

Receiving an IRS notice regarding a tax error requires a timely response. Upon receiving a notice, the first step is to read it to understand the specific issue identified by the IRS and any required actions. Notices include a unique identification number (such as a CP number) and a deadline for response.

Next, gather all relevant documentation that supports your original tax return or helps clarify the discrepancy. This may include income statements (W-2s, 1099s), expense records, bank statements, and copies of your previously filed tax returns. Comparing the information in the notice with your personal records can help determine if you agree with the IRS’s assessment.

Responding to the IRS within the specified deadline is important to prevent additional penalties or collection actions. The notice details the preferred response method, which can include mailing a letter and supporting documents or using an online portal. Your response should clearly explain your position, provide any requested documentation, and include the notice’s identification number. If you disagree with the notice, providing a written explanation detailing your dispute is necessary. If the issue is complex or you are unsure how to proceed, consulting with a tax professional, such as a Certified Public Accountant or an enrolled agent, can provide guidance and representation.