Does filing an amended tax return suggest that someone made a mistake on the first return? Yes, many times it does, but it’s not always true. Amended returns can be used to correct errors, but they may also be used strategically to reduce tax liability and take advantage of new tax rules and new information for retroactive benefits. Examples include late income reports or tax forms, as well as additional deductions the company was unaware of. This article will answer the following:
- What is an amended tax return?
- When should a tax return be amended?
- How do you file an amended tax return?
What is an amended tax return?
An amended tax return is a correction, not a punitive action. For businesses, amending tax returns is a common practice that can benefit the business, so there’s no reason to be intimidated by it. Reasons for this action could include correcting employment taxes after an entity structure change, addressing late filings or missing documents, or correcting mathematical errors in the initial return.
There’s no need to rush. Don’t jump too soon if you find a missed 1099 in your back seat or realize you took a deduction you shouldn’t have. Your business can file an amended return any time within three years after the original return or two years after the tax is paid. Most tax preparers recommend waiting until the original return has been processed.
Small business owners often fear amended returns because they feel the action will lead to an audit or scrutiny from the Internal Revenue Service (IRS). That’s not true either. The US tax system is designed to allow amended returns. Audits are initiated when behavioral patterns show potential tax code violations or attempts at deception. Amended returns send the opposite message.
When is an amended return necessary?
The IRS will generally catch minor mistakes and notify you about the necessary changes and associated forms. Neither is a reason to request an amendment to a company income tax return. Amended returns are appropriate only when your tax liability is significantly impacted. Examples of this include:
- Filing under the wrong business entity type: Mistakenly filing as a sole proprietor or partnership while operating as an LLC is grounds for an amended tax return, even if the liability doesn’t change. Failing to file for your pass-through entity could result in fines, penalties, or dissolution by the state where your business is located.
- Misclassifying employees vs. independent contractors: Small businesses must do tax withholding for W-2 employees. Classifying them as independent contractors changes the tax liabilities of the individual and the company. The IRS might also view this as tax fraud if not corrected with an amended return.
- Failing to report all income or deductions: Failing to report all income or deductions could be done accidentally or intentionally. In 2025, new reporting rules will be introduced for third-party payment providers, including Venmo and PayPal. Keep an eye out for 1099s from those platforms if you use them for payment processing.
- Missing tax credits and deductions: Small business owners sometimes overlook tax deductions for home offices, business-related expenses, and depreciation. Amending a return ensures you claim what your company is entitled to. Qualifying criteria for credits and deductions do change, so check with your accountant for this year’s guidelines.
There’s opportunity in refunds, additional deductions, and new tax law, and you can file an amended return to capitalize.
Filing an amended return isn’t just about fixing mistakes. It’s also about maximizing benefits. By reviewing and amending past returns, business owners and certified public accountants (CPA) partners uncover some of the following errors and/or omissions:
Get refunds for overpayment.
Preparing an amended return could reveal that you overpaid your taxes in a previous filing. That means the IRS could owe you money. Don’t be afraid to ask for it back. Those funds could be used to grow your business.
Reduce tax liability with additional deductions.
Many small businesses owe the IRS money when they file. That bill can be paid when filing or stretched out in a payment plan. Filing an amended return with additional deductions could reduce the liability.
Benefit from the latest changes in tax law and IRS rules.
New tax laws sometimes offer retroactive benefits that you can take advantage of when you file an amended return. This is something you should discuss with a tax professional. You could be missing out on tax savings right now.
How to file an amended return.
Identify what you need to correct and what your goals are regarding tax reduction. Here’s a good framework of step-by-step instructions you can follow.
1. Gather your documents.
Find all your W-2s, 1099s, expense receipts, and corrected payroll records. The originals should be attached to the original tax return. If not, you can work on a more effective organizational system this time, such as online document storage. An accountant can help you with that.
2. Determine the necessary changes.
The most common changes on an amended return are income, deductions, credits, or employment taxes. Identify where you need to make corrections and confirm you have the official documentation to back them up.
3. Complete the correct forms.
For personal and business income tax amendments, file Form 1040-X. This form was revised in February 2024, so make sure you have the right version. For payroll and employment tax corrections, use Form 941-X. This form was revised in April 2024. It’s specific to employment tax.
4. Provide a clear explanation of changes.
Clearly explain the changes on the amendment form to help the IRS process it smoothly. This step is essential if you want the amended return to be approved. Improper explanations could lead to denial or further inquiry.
5. Submit and track amendments.
Amended returns can take up to sixteen weeks to process. Keep copies of all documents and track your submission. This year, a new administration is in office, so be prepared for a particularly long wait.
Remember, amending a return is a positive action for your business, so there should be no stigma attached to it.
Amending returns is a business strategy. Use it.
Reviewing previous tax returns and making necessary amendments to optimize tax liability is a sound business strategy. We can adjust tax filings to reflect new business structures, recalculate depreciation, or correct past mistakes. Your business benefits and your tax filings are compliant.
Schedule a discovery call today to get support on amended tax returns.
Talk soon,
Jeremy A. Johnson, CPA