To Amend a Tax Return or Not? The Question for Many Americans

amend a tax returnBecause tax returns are completed by humans, whether individuals or their CPA, there will inevitably be errors. Many of these are caught at a later time. Should you amend a tax return if you later discover that there was an error? Here are a few issues to consider when making this decision.

1. Follow the money trail.

Amending a tax return requires money, both in accounting time and in potential IRS fees. If the mistake is in the IRS’s favor, an amended return could mean a higher refund. This can lead to a substantial amount of money for some taxpayers, such as corporations and wealthy individuals.

If the error is in your favor, the issue becomes even more complicated. While filing an amended a tax return may mean paying more money to the IRS, it can help the filer to avoid expensive fines and other punishments. For example, filing an amended return as soon as a mistake is caught can protect everyone involved from fines imposed under Section 6662. However, the Supreme Court has ruled that failure to file an amended return is not necessarily tax evasion, further complicating the matter.

2. Accountants have responsibilities to both customers and the IRS.

Accountants who discover a mistake in a client’s return are required to notify the client. After all, they stand to be most affected by a loss of tax return funds or IRS action, depending on the nature of the mistake. In addition, professional integrity demands ownership of errors, even honest ones. Many accountants balk at admitting to mistakes, but this is demanded by both the law and the ethical standards of the accounting profession.

According to Treasury Circular 230, an accountant absolutely must notify clients when it is discovered that they are in conflict with tax law, even when this happened outside of the accountant’s services. Accountants also must warn clients of the penalties for failing to comply. Clients are not required to correct this situation; similarly accountants are not required to reports these oversights. However, keeping your clients appraised of their status in light of IRS regulations ultimately is a CPA’s job. This holds true whether the error is a simple error or total noncompliance.

3. The IRS is not obligated to accept amended filings.

The IRS traditionally has accepted most amended returns, but this is totally at their discretion according to the law. In general, the IRS has always accepted returns that correct simple mathematical errors and other honest mistakes. They are not as consistent with amendments that introduce new information. If they refuse your amendment, the only recourse is an expensive court battle.

Deciding whether to amend a tax return is a serious choice with consequences. Ultimately, accountants are responsible for giving their clients all of the information that they need to make this decision. Clients then can make an educated decision on whether to amend or not to amend a tax return.