Have a Tax Question? Ask a Tax Expert
Hello and thank you for coming to our website. We appreciate the opportunity to help you with your questions. As a tax professional, my legal requirement is to advise you that you are legally required to amend your incorrect returns and pay any additional taxes owed as a result of the amendments. A tax professional's responsibility ends at telling you that information as well as that if you wait and the IRS finds the problem, they will charge you interest and penalties in addition to the taxes owed. A tax professional can't force you to amend your return nor can we decide for you whether to fix the problem right now or wait and hope the IRS doesn't catch the problem. Whether you amend the returns and pay the taxes or wait for the IRS, you will still be liable for interest and penalties on the taxes not originally paid. The longer you wait, the higher the interest becomes. Depending on how long it's been since the first year that you claimed your step grandchildren, you may be accruing increasing penalties or you may have already reached the maximum allowed penalty for underpayment of taxes. If you admit the problem and amend the returns yourself before being contacted, you may be able to avoid any additional penalties related to inaccuracy, negligence, and/or filing fraudulent returns. You will definitely have a better argument for an innocent mistake if you admit the problem and amend your returns. The maximum federal penalty for tax underpayment due to fraud is 75% of the underpayment. The maximum federal penalty for failure to pay is 25% of the underpayment. An accuracy related penalty is 20% of the underpayment. More than one of these penalties can be applied at the same time. The interest on the unpaid taxes doesn't have a maximum. Interest will continue to accrue from the time the incorrect return was due until the total amount of unpaid taxes are paid.
If you decide to amend your returns and pay the taxes, then you will probably need to amend your Pennsylvania returns also because the change will probably change the amount of state tax that was due as well. When amending a return, you will need to calculate the taxes owed under the rules in effect for the year you filed the original return. Since most people don't keep old copies of tax rules, you may find it difficult to find the original rules.
I would urge you to consider going to a national tax preparation firm that is open during the summer or a CPA and paying them to correct the tax returns. They will be familiar with the rules for the previous years. They will also be able to look at your original tax returns and see if there may be any mistakes in your favor that might offset some of the taxes you will owe when you remove your step grandchildren. The amended tax returns can become very complicated. Also, you will be contacted by the IRS with a bill for interest and penalties. The IRS may also have questions about your returns. If you have a tax professional amend your returns, then that tax professional can deal with the IRS on your behalf and work out the best deal possible with the IRS about penalties. It will cost you a hundred dollars or more per tax return to be amended, but if you work with a company that guarantees their work, they will work with the IRS on your behalf without you having to pay additional money.
I am sorry that you are in this position. I know that dealing with the IRS is very scary, even for tax preparers. I hope that you can get help in clearing up this problem with the minimum amount of difficulty. If you need any more information about this problem or if you would like me to explain any information I've provided in greater detail, I will be happy to continue working with you until you are comfortable that your question has been answered to your satisfaction. I want to help you with this difficult and scary situation as much as I can.