Filing an Amended Tax Return (Q & A)

Mar 2015

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Q. Dear Rick:

I have a few questions that I hope you can help me with. I just had my 2014 tax return prepared and my tax preparer noticed that a mistake was made on my 2013 return. The mistake dealt with the sale of a mutual fund that I had owned for years. Basically, my preparer used the wrong cost basis. As a result, as opposed to reporting a gain I reported a loss. My tax preparer recommended that I immediately file an amended return. My question is should I file an amended return? My thoughts are that since I have not heard from the IRS, why do anything. If the IRS contacts me in the future I will deal with it then.


A. Dear Fran:

I do believe that it would make sense for you to file an amended return. My reasoning is based upon a few different factors. First, and probably the most important, is the fact that as taxpayers it is our responsibility to file fair and accurate returns. As a result, when we discover an error, whether it’s in our favor or against us, it is our responsibility as taxpayers to correct the error. Therefore, from that standpoint alone I believe you should file an amended return.

The fact that the IRS has not discovered the error does not mean that they won’t; particularly in your situation, where the issue was with the basis. In the past, basis was not reported to the IRS and thus, the likelihood of them discovering an error was minimal; however, that is no longer the case. Over the last few years basis has been reported to the IRS. Thus, there is a greater likelihood that eventually the IRS will discover the error. In that regard, I guarantee that if an error is made it is always better for you, the taxpayer, to correct the error before the IRS gets involved.

If the IRS discovers the error, in addition to interest that you would have to pay, there is a greater likelihood that they will assess you penalties. On the other hand, if you voluntarily report an error to the IRS you have a much greater likelihood of avoiding any penalties. In addition, if the IRS discovers the error there’s a greater chance they will want to look at past years tax information which could lead to audits. Trust me; no one wants an audit from the IRS.

When it comes to mistakes on tax returns, for many, the issue isn’t whether or not they should file an amended return; but rather, what are their chances of being caught. That obviously is a difficult question; however, it is important to keep in mind that over the last few years more and more of your information has been reported to the IRS and thus, particularly in the case at hand, the chance of the IRS discovering the error is much greater than it was in the past. To me, the issue isn’t whether the IRS will catch you or not; the real issue is what our responsibility is as citizens. Our responsibility is to file fair and accurate returns and to correct any errors that we discover. That is why I recommend that you file an amended return.

I, like the great majority of you, don’t like paying taxes; nor do I believe it is more patriotic to pay more in taxes than you have to. However, the bottom line is that it is the law and we should all follow it. In addition, I can tell you when it comes to taxes, those that play by the rules tend to sleep better at night.

Good luck!