Taxpayers are advised to file their returns as soon as possible, in part to reduce their risk of taxpayer identity theft. But what happens if you file right away, and then discover you’ve left key information out of your return? A Credit.com reader recently asked, “I already filed my taxes and just got a 1099-C. What do I do?“
Here’s what you shouldn’t do: panic and just file a new return. Doing so can just muck things up and may delay the processing of your return.
Instead, if you discover you need to correct a return you filed, you typically must file a specific form: IRS Form 1040X. The form allows you to adjust information included in your original return. It is available through most tax preparation programs and on the IRS website as well. The completed form must be returned to the Internal Revenue Service by mail. E-filing is not an option here.)
“Whether you should amend or not depends a few key factors: whether your tax return was accepted or rejected by the IRS and whether you need to amend due to change in your filing status, income, deductions and credits,” says Lisa Greene-Lewis, a certified public accountan and TurboTax tax expert. “If your questionable changes are related to a change in filing status, income, deductions and credits, then you should file an amended tax return,” she says. But in the case of a rejected return, you can correct and resubmit it.
Maybe You Should Do Nothing
If you’re expecting a refund, and realized you omitted some income, you may even be able to sit tight. “It’s quite possible that, in the case of a 1099 or other third-party income reporting document that was overlooked, the IRS took note of the amount, thanks to the copy it receives of such documents,” says Kay Bell, founder of the Don’t Mess With Taxes blog. In those cases, the IRS may automatically adjust the refund. “When the amount of your refund is not what you expected based on your filing, the IRS usually sends you a notice, separate from the check or direct deposit, explaining the difference,” she says.
But if you owe the IRS, then additional information from a 1099 or other income may mean you owe more. In that case it’s important to file a 1040X as soon as possible and pay the amount due. “You want to stop any interest and possible underpayment penalties from accruing as quickly as possible,” says Bell. “No need to pay Uncle Sam more if you can put on the brakes.”
In the case of our readers who received a 1099-C after they already filed their returns, one thing to understand is that the amount of income reported on that form may or may not be taxable. (Here’s a guide to understanding Form 1099-C.) The IRS will assume it is taxable, however, unless you tell them otherwise. So the first step is to determine whether the new information will change the amount of tax you owe, or the refund you get.
That means following the instructions in IRS Publication 4681 to determine whether you qualify for an exclusion such as the insolvency, bankruptcy, or Mortgage Forgiveness Debt Relief Act exclusion. If you do, you’ll use IRS Form 982 to tell the IRS why you aren’t including the amount of canceled debt in your taxable income.
1099-C, 104X, 982
If you’ve already filed, you will need to use IRS Form 1040X to transmit IRS Form 982 to the IRS. You can provide a brief explanation in Part III of the Form 1040X and attach Form 982. By doing this, you should be able to avoid having the IRS notify you in the future that you owe taxes because you failed to report this “income.”
If you don’t fully qualify for one of these exclusions, you will have to include part or all of the amount of canceled debt reported on the 1099-C as income. In that case, you will report that additional income with your gross income in Box 1 of Form 1040X and adjust your tax liability and amount you owe (or refund).
If all else fails, the IRS will likely let you know you made a mistake. “If you discover a math error or something similar, don’t worry about filing an amended return. The IRS’ calculators will catch your mistake and correct it for you, for better or worse,” says Bell. A 1099 or 1099-C that wasn’t accounted for can take longer to catch up to you, though. At Credit.com, we’ve heard from taxpayers who have just recently learned that they owe taxes as a result of one of these forms filed with the IRS last year or the year before.
[source : dailyfinance.com]