What should you do if you discover a mistake in your 2012 tax return that you already filed? You have three years to file an amended return. But the question is, should you?
Meet with your tax advisor and weigh the advantages and disadvantages of filing an extension. The answer usually depends on whether you owe the IRS or they owe you.
If you owe, you should file an amended return as soon as possible. You’re not required to, and you are not going to face criminal charges if you don’t. But it is best to file an amended return since the IRS can often take months, and even years, to send you a correction notice. But penalties and interest are adding up while you wait for them to catch the error. If you file the amended return within a few weeks of the error and pay the tax, the IRS often doesn’t assess penalties. Of course, they will always charge interest. (You should file an amended return even if you can’t pay the balance due. Just set up a payment plan.)
If the IRS owes you, the answer is much more difficult. You may think it is easy since they owe you money, but there are two reasons why you may not want to file an amended return. First, if the refund will be minor, the cost of hiring a tax preparer may not be worth the effort. Second, you may be drawing more attention to your return by submitting an amended return. I have personally seen many instances where an audit followed an amended return requesting a refund. Of course, the IRS will not admit that amended returns increase your chances of audit.