Do You Need to Amend Your Tax Return?

The COVID pandemic prompted numerous temporary changes to the tax laws for 2020 and 2021. From Economic Impact Payments, penalty-free IRA distributions and the expanded child tax credit to Employee Retention Credits and credits for paid leave, taxpayers had ample areas to make mistakes when completing their tax returns — on top of the usual annual tripwires. Here's what you need to know if you're considering amending your 2020 or 2021 federal income tax return.

Reasons to Amend

Taxpayers commonly cite several reasons for amending their tax returns but not all of them justify doing so. Generally, you should amend only to make corrections to reported items such as filing status, dependents, total income, deductions and credits.

For example, you should file an amended return if:

  • You determine that it would have been more advantageous to file as a head of household than as single person,
  • You realize you didn't report the correct number of dependents,
  • You receive an additional or corrected W-2 or 1099 after you filed, or
  • You determine that you were eligible for an additional deduction or credit.

In addition, you may want to file an amended return due to tax law changes. Congress regularly passes so-called "tax extenders" that retroactively renew expired tax breaks. The Consolidated Appropriations Act, for example, made permanent the Section 179D accelerated depreciation for energy-efficient buildings, which had been set to expire for property placed in service after 2020.

No Need to Amend

On the other hand, you needn't amend your return if you realize you made math errors. The IRS will correct the calculations and notify you of the changes. You're also not required to amend your return if you failed to include forms like W-2s or schedules with your filing; the IRS typically will request such missing documents.

In addition, you usually don't need to amend your return because you receive a CP2000 notice, also known as an underreporter inquiry. The notice indicates that the income or payment information the IRS has on file doesn't match the information you reported. It explains which information the agency used to determine the proposed changes to your tax return. If the information on the notice is correct, you don't have to amend unless you have additional income, credits or expenses to report.

Similarly, receipt of an IRS audit notice isn't a trigger to amend a return. More than 70% of IRS audits are "correspondence" audits, which are conducted by mail for a single tax year. These audits involve only a few issues that the IRS believes can be resolved by reviewing the relevant documents. Read the notice carefully and submit only the requested documents. Contact your tax advisor with questions.

How to Amend Your Return

If you have a valid reason for amending, don't delay. Generally, for a credit or refund, you must file Form 1040-X, "Amended U.S. Individual Income Tax Return," within the later of:

  • Three years (including extensions) after the date you filed the original return, or
  • Two years after the date you paid the tax.

If you filed the original return early, it's considered filed on the due date (generally April 15). If you had an extension but filed earlier, the return is considered filed on the date the IRS received it.

Some exceptions apply. For example, you might have extra time to file a claim for a credit or refund if you were affected by a federally declared disaster. Different deadlines apply to claims based on bad debts, worthless securities, foreign tax credits or deductions, and net operating losses.

You must file a separate form for each tax year you're amending. You can file more than one amended return for the same tax year. Attach any required forms and schedules, generally those relating to the change. For instance, Schedule A would be attached if you're changing an itemized deduction.

Important: Remember that amending your federal return probably means you'll need to amend your state return, too. Amending a federal return also could affect your liability for the alternative minimum tax.

How To Minimize Penalties, Late Fees and Interest

If you end up owing additional taxes as a result of amending, you should pay those as soon as possible to mitigate penalties and interest. If you don't pay the additional tax due within 21 calendar days from the date of notice and demand for payment (10 business days from that date if the amount is $100,000 or more), the penalty usually is half of 1% of the unpaid amount for each month or part of a month the tax isn't paid.

The penalty is on top of interest charges on late payments. You may be excused from paying the penalty if you can show reasonable cause for not paying the tax on time. If you can't pay the amount in full, you might qualify for an installment agreement.

We Can Help

Filing an amended return can be a complicated and time-consuming process. Keep in mind that the IRS has a large backlog of unprocessed amended returns and processing for an individual return may take longer than usual. Contact your tax professional to determine what's right for your situation and ensure your return is corrected as quickly and painlessly as possible.

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