Made a Big Tax Mistake? Here’s When (and How) to Fix It

Even the most careful taxpayer can make mistakes. A missed 1099, an overstated deduction, or an incorrectly classified expense can turn an otherwise accurate filing into a substantially incorrect return. Acting quickly can prevent penalties, protect your credibility, and demonstrate good-faith compliance with the IRS.

What Makes a Return “Substantially Incorrect”?

The IRS considers a return to be substantially incorrect when an error materially changes the amount of tax owed or refunded—large enough to affect your overall liability. In practice, that usually means:

– An understatement of tax exceeding 10% of the correct amount or $5,000, whichever is larger, or
– An omission of gross income greater than 25% of what should have been reported.

These thresholds allow the IRS to extend its audit window from three years to six and apply accuracy-related penalties.

Common examples include missing or underreported income, claiming deductions or credits the taxpayer isn’t eligible for, misclassifying personal expenses as business costs, or using an incorrect basis on investments or property sales. Small math or rounding errors don’t count—the IRS corrects those automatically—but substantial errors change the substance of your return.

Why You Shouldn’t Ignore It

Leaving a substantial error uncorrected can trigger penalties and daily interest:

– Accuracy-related penalty: 20% of the underpaid tax
– Valuation misstatement penalty: 40% if basis or valuation is significantly overstated
– Civil fraud penalty: Up to 75% if intent to deceive is proven
– Failure-to-pay penalty: 0.5% per month, up to 25%
– Interest: Accrues daily until paid

Even unintentional errors can raise flags if third-party forms don’t match your return. Fixing the issue voluntarily is far better than waiting for an IRS notice.

How to Correct the Return

The returns can be corrected by filing an amended return. Individuals file Form 1040-X, Amended U.S. Individual Income Tax Return; businesses file the appropriate amended form (such as 1120-X or amended 1065).

Most amended returns can now be filed electronically. If you expect a refund, wait until your original return is processed; if you owe more tax, pay it when you file the amendment to limit interest and penalties.

Generally, an amended return must be filed within three years of the original return or two years from the date the tax was paid to claim a refund. After that, you can still correct the return, but you can’t recover overpayments.

The Qualified Amended Return (QAR) Advantage

If you discover an error before the IRS does, you may qualify to file a Qualified Amended Return (QAR). Filing a QAR can eliminate the 20% accuracy-related penalty and other underpayment penalties for the corrected items—provided it’s filed before the IRS begins an audit or receives third-party information about your issue.

A QAR doesn’t remove fraud or late-payment penalties, and interest still applies, but it can significantly reduce overall cost and show good-faith effort to comply.

When to Seek Professional Guidance

Amending a return can be straightforward—or surprisingly complex. A tax professional can help determine whether an amendment is necessary, whether it qualifies as a QAR, and how to minimize potential penalties. Even a brief consultation can confirm you’re taking the right steps and provide peace of mind.

Take Action Early!

Tax mistakes happen—but ignoring them only makes things worse. Correcting a substantially incorrect return demonstrates integrity and helps limit penalties. Acting early prevents small issues from turning into expensive problems later.

When in doubt, don’t wait for the IRS to reach out. Reviewing and amending your return promptly ensures you stay compliant and confident moving forward.

Not sure whether your return needs to be amended? Treu Accounting can help you evaluate your situation, quantify potential exposure, and determine whether a qualified amendment is appropriate. Contact us today to schedule a confidential review and take the first step toward resolving the issue with confidence.