if you knew the return was inaccurate when you filed it, you should amend it to make it accurate without delay. The IRS rarely brings up an originally filed return in civil audits or in criminal prosecutions once the taxpayer has come forward and attempted to correct it by filing an amended return. But to take advantage of this rule, you need to be proactive, and you need to make the correction before the IRS finds your error.
Example: You file your original return April 15 and state you aren’t subject to income taxes because they are unconstitutional and you are not a slave to the federal government. You had better file an amended tax return properly reporting your income and paying your tax before the IRS contacts you to tell you they disagree with your original return. (See “Ten Tax Protestor Claims To Avoid.”)
Recently the IRS issued Notice 989, stating that independent contractors recharacterized as employees “must” file amended tax returns. Yet it’s unclear that the IRS has the authority to change the “should” standard in its Regulations by a Notice, and in any case, this is only one setting in which the amended return dilemma can arise. For discussion, see “Ten Things IRS Wants Workers to Consider When Contractors Become Employees,” Vol. 9, No. 156, Daily Tax Report (Aug. 17, 2009), p. J-1.
No. 2: You can’t cherry-pick what you correct.
You don’t have to file an amended return, but if you do, you must correct everything. This is the IRS version of “in for a penny, in for a pound.” To use a different metaphor, you can’t cherry-pick and make only those corrections that get you money back, but not those that increase your tax liability.
Example: You file your original return and believe it to be accurate. Six months later, after you’ve already received the $3,600 refund you claimed, you discover you forgot to report a stock loss that would have netted you an additional $1,000 refund. You also discovered that you under-reported your earnings from a partnership, because you just received an amended Form K-1 saying that instead of the $50,000 of income you reported (from the first K-1), your share of the income was actually $150,000.
If you amend, you must correct both errors, not just the one in your favor. But you might be surprised to find you are not obligated to file an amended return, even though most tax advisers will tell you it’s a good idea–that’s because the IRS will probably send you a bill based on the revised Form K-1 the partnership sent you once its computers get around to matching that form against your Form 1040. (For more on computer matches, click here.)