What to Do (and Not Do) in 2021 if You Made Mistakes on a Prior Year’s Tax Return

It’s tax season. You’re working on your 2021 tax returns, and you just realized that you made a mistake in a prior year. What should you do? As Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group explains, your options will depend on the specific mistake you made, how much you might owe and a variety of other factors.

4 Options for Correcting Mistakes on a Prior Year’s Tax Return

Generally speaking, there are four options for correcting mistakes made on a prior year’s federal tax return:

Filing an Amended Return

In most cases, correcting a filing mistake involves filing an amended return. The IRS encourages taxpayers to file amended returns when necessary, and it provides some tips for doing so. When filing an amended return, however, it is important to make sure that both (i) filing an amended return will fix your issue, and (ii) you are accurately reporting what you failed to report previously. If either of these is not the case, your amended return could end up leading to scrutiny from the IRS.

Submitting a Streamlined Filing

Submitting a streamlined filing is an option for U.S. taxpayers who have failed to report their foreign financial assets under the Foreign Account Tax Compliance Act (FATCA). If you omitted Form 8938 in a prior year (or if you omitted information about a foreign financial asset on Form 8938 in a prior year), then submitting a streamlined filing might be your best option.

Making a Voluntary Disclosure

Another option for taxpayers who need to correct past mistakes is to make what is known as a “voluntary disclosure.” As IRS Criminal Investigations (IRS-CI) explains, “If you have willfully failed to comply with tax or tax-related obligations, submitting a voluntary disclosure may be a means to resolve your non-compliance and limit exposure to criminal prosecution.”

If you inadvertently made a mistake, then submitting a voluntary disclosure is not the right choice for you. However, if you need to correct a willful violation in order to avoid facing an IRS-CI investigation, then you should consult with a Washington D.C. tax lawyer about utilizing IRS-CI’s Voluntary Disclosure Practice.

Seeking a Settlement Agreement or Offer in Compromise

If you need to submit an amended return or streamlined filing but cannot afford to pay what you owe, then you may want to consider a settlement agreement or offer in compromise. Again, you should consult with a Washington D.C. tax lawyer to determine how best to move forward.

What NOT To Do if You Have Made Tax Filing Mistakes

While you have options, there are also mistakes you need to avoid. For example:

Do NOT Ignore Your Mistake

One you identify a filing error, you need to correct it. Failure to do so could enhance your liability in the event of an IRS audit or investigation.

Do NOT Make a “Quiet Disclosure” on Your 2021 Returns

Do not attempt to report a prior year’s assets or income on your 2021 return. This is known as a “quiet disclosure,” and it is disfavored by the IRS.

Discuss Your Options with Washington D.C. Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

For more information about correcting a past IRS filing mistake, schedule a confidential consultation with Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group. Call 202-349-4033, email ket@thornlawgroup.com or request an appointment online now.