Have you made a mistake on your tax return? Here’s how to fix it before the IRS comes knocking.
Let’s begin with a fictitious yet appropriate scenario that illustrates the typical experience of a business client who has realized they’ve filed a wrong tax return. Predictably, it goes something like this:
Said client (let’s call her Sarah) steps into the office of the local CPA firm. She meets with a tax associate (let’s call him John). Gripping a file in her hands filled with tax documents, she has a mixture of worry and embarrassment on her face. “I made a mistake on my tax return”, she says, trying not to give away her anxiety.
John, a seasoned CPA with years of experience, has seen this many times before and has nothing but empathy for what it must feel like to realize you’ve submitted a wrong filing to the Internal Revenue Service. “Come and sit”, he says. “Let’s figure this out”. A look of relief crosses Sarah’s face as she eagerly hands over her tax file.
If you’ve ever found yourself in Sarah’s shoes - worried about IRS penalties after filing an incorrect tax return - you’re not alone. In this article, we’ll continue with Sarah’s story and show you exactly how to fix an error before it costs you.
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What should you do when you’ve filed your taxes wrong?
This situation is not as uncommon as some might imagine. CPAs deal with a number of issues every tax season pertaining to tax fraud, additional taxes, wrongly recorded tax liability, civil penalties, and even criminal charges against clients.
Thankfully, they know exactly how to handle these common tax mistakes with the IRS. In Sarah’s case, she had accidentally misreported her income from a freelance project (a common mistake), leading to reduced tax obligations. Almost immediately, she wanted to know what the impact of the mistake would be.
John explained calmly that it was in her favor that she caught the mistake and was willing to correct it. The IRS allows taxpayers to fix errors by filing an amended tax return using form 1040-X. The key is to act quickly and in good faith before the IRS notices the reduced taxable income.
This moment highlights a crucial first step: take responsibility and act immediately. Whether you miscalculated deductions, wrongly accepted a tax refund, misfiled estimated tax payments, incorrectly recorded payroll taxes, overstated charitable donations, or mistakenly contravened a tax law (all common mistakes), the IRS will be more lenient if its been a honest mistake and you fix it promptly.
Filing an amended tax return
After understanding the exact reasons for the wrong filing, John was able to get to work immediately and submit form 1040-X. He explained to Sarah that they would use this one form to include the corrected income figure and attach any supporting documents. For Sarah, this meant attaching the updated income statement and a brief explanation of the error.
This highlights another issue around the timing of the correction. You have three years from the original filing date or two years from the date you paid the tax - whichever is later. Missing this window could leave you stuck with penalties and even claims of a false tax return against you.
It's not impossible to miss this window, and it does make things more complicated. Businesses sometimes trust a tax preparer to handle the return without checking it, or they’re blissfully unaware of certain tax rules that apply to them until it's too late. Anytime there is money owed to the federal government, it’s best to get professional advice, especially if the 3-year resubmission window has lapsed.
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Don’t let a small mistake or confusion about tax laws turn into an even bigger issue. Consult with our team of highly skilled tax associates today, and put it behind you.
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What is the penalty for filing an incorrect income tax return?
As John got to work on Sarah’s case, her biggest concern was the potential penalties. “Will I need to pay extra for this mistake?”, she asked, sounding tense.
John explained to her that there are two main penalties she might face:
Accuracy-related penalty: Up to 20% of the underpaid taxes owed.
Failure-to-pay penalty: 0.5% per month on the unpaid balance, up to 25% if Sarah delayed making the penalty payments on the due date.
He further explained that the IRS has two types of determinations related to an accuracy-related penalty, and that is whether there has been negligence or a disregard for rules and/or a substantial understatement of income tax. Unfortunately for Sarah, she paid 15% less tax than was due, which qualifies as a substantial understatement. Her face fell.
But then he said something that Sarah found very encouraging. “There’s something called a first-time penalty abatement. If this is your first major tax error, and you’ve otherwise been compliant when you pay tax, you can request relief and possibly avoid the penalties altogether. The IRS will decide this based on your individual case.
Sarah had never heard about this, and she was relieved that she had a professional CPA help to solve her problem.
A CPA: Your best ally for wrong tax filings
As Sarah’s story unfolded, one thing became clear: Navigating tax corrections is complex. Without John’s help, she might have missed key steps- or worse, overpaid in penalties and interest.
Here’s how John made the difference to Sarah’s case:
He conducted a thorough review of Sarah’s case, identifying where and why the error occurred and Sarah’s culpability in the matter.
He submitted an accurate form 1040-X immediately after reviewing Sarah’s case and clearly explained the error to the IRS, reducing the risk of rejection.
He explored options like first-time penalty abatement with Sarah, as well as other relief programs.
He represented her case to the IRS when called on to do so a few weeks later.
He explained to Sarah that her mistake could have been avoided with proper record-keeping and clear accounting processes.
Take action today
Mistakes happen, but they don’t have to cost you peace of mind and all your hard-earned money. If you’ve filed an incorrect tax return, contact Hall Accounting Company today for a consultation. Our team will guide you through the process and help you resolve your situation in the best way possible.