What Happens if You Miss Something on Your Taxes?

Even with careful preparation, taxpayers can miss something on their tax returns. Inaccuracies, whether unreported income or incorrect deductions, can lead to complications with the Internal Revenue Service (IRS). Understanding and promptly correcting these errors helps mitigate potential penalties and interest charges.

Identifying Common Errors

Taxpayers may inadvertently make mistakes on their returns, leading to discrepancies. A frequent issue involves unreported income from sources like side jobs, gig economy earnings, or investment income not fully detailed on Form 1099s. The IRS receives information from third parties, making such omissions highly likely to be detected.

Another common type of error is missing out on eligible deductions or credits, such as student loan interest, educator expenses, the Child Tax Credit, or energy credits, which can result in a higher tax liability. Incorrect filing status, like filing as single when eligible for Head of Household, also frequently occurs. Simple mathematical errors or transcription mistakes, such as misplacing a decimal point or entering incorrect Social Security numbers, can lead to processing delays and discrepancies, as can missing necessary information from tax forms like W-2s, 1099s, or K-1s.

Understanding IRS Action

The IRS employs systems to identify discrepancies between information reported by taxpayers and data received from third parties. These systems automatically match W-2s, 1099s, and other income statements to filed returns. When a mismatch is found, the IRS often initiates contact through notices, such as a CP2000 notice, indicating a discrepancy in reported income or payments. These notices are not audits but proposals to address potential issues.

If an underpayment of tax occurs, interest may be assessed on the unpaid amount. This interest accrues from the original due date of the return until the date the tax is paid in full. The interest rate is determined quarterly based on the federal short-term rate plus a percentage.

In addition to interest, various penalties may be imposed. The failure-to-pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, capped at 25%. The failure-to-file penalty is 5% of the tax due for each month or part of a month a return is late, up to a maximum of 25%. If both penalties apply, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty for that month.

Accuracy-related penalties may also be assessed at a rate of 20% of the underpayment attributable to negligence or substantial understatement of income tax. Negligence involves a lack of reasonable attempt to comply with tax laws, such as not including income shown on a Form 1099. A substantial understatement of income tax occurs for individuals if the understatement exceeds the greater of 10% of the tax required on the return or $5,000. A frivolous return penalty may be applied in cases of intentional misrepresentation.

Amending Your Tax Return

When a taxpayer discovers an error on a previously filed tax return that changes their tax liability or refund, they can voluntarily amend it. This proactive step is taken before the IRS initiates contact regarding the discrepancy. Form 1040-X, Amended U.S. Individual Income Tax Return, is used for amending an individual income tax return.

To complete Form 1040-X, taxpayers need their original tax return for the year being amended, along with any new supporting documentation. The form requires entering the original amounts filed, the net changes, and the corrected amounts. This involves using Columns A, B, and C to indicate adjustments and calculate new figures. Part II, “Explanation of Changes,” requires taxpayers to describe the reasons for the amendment.

Once completed, Form 1040-X should be mailed to the IRS center specified in the form’s instructions. Taxpayers should keep a copy of the amended return and all supporting documents. Processing amended returns can take several weeks or months. If the amendment results in additional tax due, payment should be submitted with the amended return to avoid further interest and penalties. If the amendment results in a refund, the IRS will issue it after processing.

Responding to IRS Notices

Receiving an official notice from the IRS regarding a discrepancy requires a timely response. Avoid ignoring these notices, as failing to respond can lead to additional penalties and enforcement actions. Taxpayers should read and understand the notice, noting the notice number (e.g., “CP” or “LTR”), the tax year, and the specific issue identified. The notice will outline the IRS’s findings and proposed changes.

Taxpayers have two response options: agreeing with the IRS’s findings or disagreeing. If agreeing, any additional tax and interest proposed in the notice should be paid by the stated deadline, or a payment plan arranged. If disagreeing, a written explanation disputing the findings must be provided, along with supporting documentation such as proof of income, deductions, or credits.

Respond by the deadline indicated on the notice, often 30 days. Responses should be sent to the address provided, via certified mail with a return receipt requested, to ensure proof of delivery. Keep copies of all correspondence and documentation sent to the IRS. After sending a response, taxpayers should expect further correspondence, which may include an account adjustment or a request for additional information. If the notice is complex or the taxpayer is uncertain how to respond, seek assistance from a qualified tax professional.