Tax rules are complex, and eligibility requirements for deductions and credits often change from year to year. Therefore, even well-intentioned taxpayers can make mistakes on their tax returns.
Tax relief through credits, deductions, and other benefits can lower your tax bill. However, if you apply for benefits to which you are not actually eligible, report incorrect information, or make calculation errors, the IRS may require you to pay additional penalties and interest.
Thankfully, most incorrect tax relief claims are relatively easy to correct. Whether you receive a notice from the IRS or discover the mistake yourself, addressing the problem promptly can limit penalties and prevent the problem from escalating.
Here’s what you can do now if you think you’ve claimed tax relief in error.
What qualifies as a tax deduction error?
Even a small tax credit mistake can cause problems with your claim. “Most mistakes result from a misunderstanding of the rules rather than intentional abuse,” says Hector Castaneda, a certified public accountant and principal at Castaneda CPA Firm. Here are some examples of common mistakes.
- Claiming a tax credit or deduction for which you do not actually qualify
- Reporting incorrect income, dependents, and filing status
- Misclassifying personal and business expenses or claiming the wrong amount
- If you make a calculation error that affects the amount of deduction or refund
- Lack of sufficient documentation to support claimed benefits
What if the IRS discovers an error on my tax return?
The IRS will send you a letter in the mail if it finds errors on your tax return. “The IRS won’t call, email, text, or show up at your door unless it’s a criminal case,” says Brian Barnhart, a tax attorney at Fox Rothschild and a former IRS trial attorney.
Don’t ignore the letter you receive from the IRS. This can cause further problems. Bernhardt explains that IRS notices typically have a response deadline of 30 to 90 days. “If you ignore these deadlines, you may lose your right to file a complaint with the IRS,” he says.
Instead, you should take steps to fix the problem immediately. “The best first step is to gather your returns, supporting documents, and notices to determine whether an amended return, amended payment, or formal response is needed,” says Debra Taylor, CPA and chief tax strategist at The Carson Group.
Do I have to return the money?
Generally yes. If you receive a tax relief for which you are not actually entitled, you generally must pay the full amount owed to the IRS, plus interest.
For example, Castaneda explains that he has clients whose children are no longer dependents as they age. The customer was still claiming tax credits for medical insurance that he was not actually eligible for. “They were expecting a large refund, but with the extension they now have to pay back the credit and incur interest,” he says.
Can I be fined if I incorrectly claim tax relief?
In some situations, the IRS may charge penalties in addition to unpaid taxes and interest.
The good news is that the IRS rarely charges steep penalties for honest mistakes or misunderstandings of complex tax laws. “First-time offenders tend to be released easily for small, non-serious mistakes,” Castaneda said.
There are also several penalty reduction programs, such as the IRS First Time Relief Program, which waive fines for many people with a compliance history.
So when do you really need to worry? “Significant penalties tend to apply when there is a pattern of mistakes, when claims are clearly unsubstantiated, when required returns are omitted, or when taxpayers ignore IRS notices,” Castaneda says.
How to amend your application for tax credits
If you receive a notice from the IRS that there is an error on your tax return, address the issue as soon as possible. To fix this you need to do the following:
- Identify the issue and collect documentation. Read the notice carefully to determine whether the problem is related to tax relief eligibility, miscalculations, missing income, or missing documentation. Gather supporting records such as receipts, invoices, tax forms, and other relevant documents.
- Respond to notifications or follow instructions. IRS notices typically include next steps. In many cases, if you agree to the notice and have nothing else to report on your taxes (such as additional income, expenses, credits, etc.), you can respond directly to the IRS notice and resolve the issue without amending your tax return.
- Please submit an amended return if necessary. You may need to amend your tax return if you find other problems or if the IRS notice specifically states that corrections are needed. In this case, you must file Form 1040-X and attach any required supporting documentation.
- Work with a tax professional in complex situations. A CPA or other tax professional can help you understand IRS notices, deal with complex tax issues, and file amended returns if necessary.
- Document your modifications. After correcting mistakes and paying additional taxes, “keep documentation showing the corrections made to reduce penalties and additional interest,” says Sherman Standberry, a certified public accountant and managing partner of My CPA Coach.
How to make sure your taxes are filed correctly in the future
Thinking ahead and gathering everything you need before filing your tax relief application can help you avoid problems down the road. “Taxpayers who avoid mistakes are typically those who plan early, track their income thresholds, keep receipts and records, and make sure each tax move fits into their broader financial plan,” Taylor says.
Many mistakes occur because taxpayers apply for tax relief without actually understanding the requirements they need to meet to qualify. That’s why it’s important to stay aware of how your tax situation changes from year to year and stay up to date with changes to laws and qualifications.
What about the big harvest? “Don’t wait until April to think about taxes,” says Taylor.
Bottom line: Errors do happen. Please fix it immediately to avoid penalties.
If you receive a notice from the IRS or notice an error on your tax return, take steps to correct it immediately. Honest mistakes are usually easy to correct. “If someone misunderstands the rules, but has the documentation and quickly corrects it, paying the unpaid taxes and interest will often resolve the issue,” Taylor says.
Keeping accurate records and understanding what you are eligible for will help you avoid problems in the future. If you need further assistance, the experts at your tax relief company can also guide you through the process.
FAQ: Incorrect tax relief application
What happens if I mistakenly claim a tax relief to which I am not entitled?
If you mistakenly claim tax relief to which you are not entitled, you will typically have to repay the benefits you received, plus any accrued interest. If the IRS finds a problem with your claim, you may receive a notification by mail.
If I incorrectly claim tax relief, will I be automatically penalized?
No, you are not automatically penalized for making a mistake on your taxes. In many cases, you only have to pay the taxes you owe along with the interest. That said, a pattern of careless mistakes or intentionally misleading claims is more likely to result in fines. Tax mistakes and ignoring IRS notices can also result in additional penalties.
Can I correct an incorrect tax credit application myself?
yes. In many cases, you can resolve the issue by responding to the IRS notice or amending your tax return yourself. However, if your tax situation is more complex, you may need the help of a tax professional.
Should I report the error before the tax authorities contact me?
Voluntarily disclosing a tax mistake can help resolve the issue early and potentially avoid paying additional penalties and interest that would result from waiting for an investigation.
