Should you file an amended return … or not?

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in Small Business Tax,Small Business Tax Deduction Strategies

Suppose you’ve just discovered a mistake on the 2012 tax return you just filed in April. Should you file an amended tax return?

Strategy: Weigh the potential pros and cons. Then decide what’s best for you.

Although there may be extenuating circumstances, the outcome will usually depend on whether you owe Uncle Sam or he owes you.

You owe Uncle Sam: File an amended return right away. It doesn’t mean you’re going to jail if you don’t, but it’s best to come clean as soon as possible. If you file an amended return within weeks of submitting the original, the IRS likely won’t assess penalties. Of course, you’ll still owe the tax liability resulting from the error, plus interest dating back to the original due date.

On the other hand, if you gamble that the IRS won’t detect the error, you’re playing with fire. The penalties for an oversight can be substantial. The IRS generally has three years to audit your return (six years if you under-reported income by 25% or more). And there’s no statute of limitations if fraud is involved.

If you can’t pay your tax bill in full right now, file your amended return anyway. Then you can usually negotiate an installment payment deal when the IRS tallies up the damages.

Uncle Sam owes you: It’s a different story if you uncover an error tilting the return in your favor. You might think it’s a no-brainer—after all, what do you have to lose? But it’s not so simple. Here are two reasons:

  1. It might not be worth the time or hassle if you’re talking about spare change. And, if you’re paying a tax pro for preparing the return, the cost might even outweigh the tax savings.
  2. You may be drawing extra attention to your return by submitting it for a second time. It gives the IRS another chance to view your return through a slightly different lens.

Tip: Some tax experts claim that filing an amended return increases your risk of audit. There’s no concrete proof to back that up, but it does increase the visibility.

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