Taxes: How to Reverse a Mistake

It is common during tax-filing season for taxpayers to discover that they botched a previously filed return.

Perhaps you just figured out that you missed some tax-saving deductions and credits on your 2014 Form 1040, which you filed a few weeks ago. Or you might have just learned that you failed to claim some breaks on your 2013 return, which was filed last year.

With today’s complicated tax rules, anyone can make a mistake. You can fix it—whether or not it is in your favor.

The first thing to know is that you shouldn’t attempt to correct the situation by filing another original return using Form 1040. That will just confuse the Internal Revenue Service and cause headaches for you, even if you are amending a 2014 return that was filed only a few days ago.

Instead, you should file an amended return using Form 1040X, Amended U.S. Individual Income Tax Return. Assuming there isn’t a big past-due tax problem, you can probably prepare Form 1040X—which is only two pages long—by yourself. Be sure to use the current version of the form, dated December 2014, which you can print out from the IRS website ( If you need to attach corrected or additional tax forms, use the forms for the year you are amending.

Getting a refund. If amending your return will result in a tax refund, the deadline for filing Form 1040X is generally the later of three years after the original return for the year in question was filed, or two years after the tax for that year was paid. In most cases, the three-year rule is the one to focus on.

If you filed your original Form 1040 before the April 15 deadline, you are considered to have filed the return on April 15 for purposes of the three-year rule. However, if you extended the return to Oct. 15, you are considered to have filed on the earlier of the actual filing date or the Oct. 15 extended due date.

Say you filed your 2014 Form 1040 on March 1, 2015, and paid the tax due on that date. You now realize you should have itemized your deductions instead of taking the standard deduction. Based on the three-year rule, you have until April 15, 2018, to file an amended 2014 return on Form 1040X to claim your refund.

On the other hand, if you extended your 2014 return to Oct. 15, 2015, and then file before the extended deadline on Sept. 1, the three-year period for filing an amended return starts running on Sept. 1. The sooner you file the amended return, the sooner you will get your refund.

Paying taxes due. If you now realize you understated your tax liability on the original Form 1040, you are expected to file an amended return and pay the additional tax. If you don’t and the IRS discovers the error, the government will bill you for the unpaid tax amount plus interest (currently at a 3% annual rate), the additional failure-to-pay interest charge penalty (at a 6% annual rate) and maybe other penalties, too.

The IRS can waive penalties if you show you had a reasonable cause for the underpayment—for example, if you relied on incorrect advice from a paid tax professional or received incorrect information from a third party, such as an erroneous Schedule K-1 from a partnership or S-corporation investment.

The sooner you file an amended return on Form 1040X and pay the tax due, the sooner you will stop racking up interest and the failure-to-pay penalty.

While the IRS doesn’t audit very many returns these days, you are highly likely to get caught if your Form 1040 omitted income that was automatically reported to the IRS on an information return, such as a Form W-2 or Form 1099.

The IRS generally has three years after the date the original return was filed to discover errors and omissions and assess additional tax, interest and penalties. However, a longer six-year statute of limitations rule applies if the original return understated gross income by over 25%. There is no statute of limitations on a fraudulent return.

If the original return understated your tax bill by only a relatively small amount, you should probably file Form 1040X and pay if for no other reason than to clear your conscience. But if there was a large understatement, this is a can of worms you don’t want to open before understanding all the consequences—including the possibility that your state income-tax collector will get into the act.

Consider hiring a tax professional with experience in dealing with past-due tax problems. Hopefully, you can get off the hook with minimal or no penalties. But be prepared to pay at least the past-due tax plus interest.

By Bill Bischoff

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Financial advisors at Gerber Kawasaki are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial. Please consult your investment professional before acting on any advice.

Gerber Kawasaki Wealth Management, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.