It’s April 16th. Anna Carlyle is recovering from the busiest season yet at her pet grooming business. She takes a breath of relief because tax season is finally over. She submitted all her tax forms for her small business by the April 15th due date, and now she just wants to take a moment to relax.
Then she realizes something awful. She made a mistake.
As a self-employed worker or the sole-proprietor of your own company, Anna’s situation may be familiar to you. Like Anna, you use IRS Form 1040 to determine, report, and file your income, deductions, and ultimately figure out how much you owe in state and federal income taxes.
But while filing your taxes by the due date can be stressful as an individual, that stress ratchets up a few notches when you’re trying to complete your business taxes on time. Like Anna, as a result of that stress, you might find that you made a mistake on the initial Form 1040 you filed with the IRS. Whether due to a calculation error, an oversight when you reported your company’s gross income, or a variety of other potential mistakes, there’s no need to panic.
Making a mistake on your taxes is nothing out of the ordinary. In fact, by some estimates, up to 20% of Americans make a mistake on their tax return. While the IRS may correct for some errors internally — such as math errors — it also offers U.S. citizens a way to amend their Form 1040 if things change, such as your filing status, your income, and your deductions or credits. And because it’s the IRS, it should come as no surprise that the way you can update that information is — you guessed it — through another form.
The form in question is known as the Form 1040X Amended U.S. Individual Income Tax Return. This is a two-page document issued by the Internal Revenue Service (IRS) for taxpayers who need to correct their original tax returns for any reason.
Unfortunately, the IRS’s instructions to file Form 1040X are over 17,000 words — 19 pages of single-spaced, two-column, 10-point font. While exhaustive, those instructions can feel daunting for small-business owners or self-employed independent contractors who just discovered they made a mistake on their taxes.
The good news is it doesn’t have to be. Let’s review the steps for using and submitting a Form 1040X amended tax return.
Step 1: Determine if you can use Form 1040X
If you filed a Form 1040, then you’re familiar with this individual tax return form. It is frequently used by sole proprietors, independent contractors, entrepreneurs, and small business owners to file their business taxes. As long as your business passes profits and losses through directly to you, then you more than likely filed a Form 1040 and posted your business revenue and expenses to Schedule C of the 1040 form. In fact, filing Form 1040X will work perfectly as long as you:
- Filed Form 1040, 1040A (1040-A), 1040EZ (1040-EZ), 1040NR, or 1040NR-EZ
- Received a refund or made a payment using those forms within three years
- Need to correct elections, filing status, or claims for unused credits
Returning to Anna’s case, because she runs her pet-grooming company as a sole-proprietorship, she filed her business taxes using Form 1040. While she was able to file by the deadline, she realized as she was finalizing her books that she made a mistake when it came to reporting her income. Luckily, Anna knows she can submit Form 1040X to fix her error.
Step 2: Gather the necessary documents
In order to amend your taxes, there are several documents that you’ll need to gather before you start filling out form 1040X. First, you’ll need a copy of the original Form 1040 you already submitted.
Next, you will also need a copy of the amended forms you are seeking to update. For example, if you’re amending your 1040 because an employer or client issued an incorrect W-2 or 1099 the first time you submitted those forms, you’ll also need to include the updated W-2 or 1099 with your amended return. Failure to include these supporting documents might be cause for the IRS to reject your 1040X or delay its processing.
Step 3: Fill out Form 1040X
Now it’s time to get down to actually filling out the two-page form 1040X. To begin, it will ask you for your address, name, social security number, filing status, and income — similar to what you’ve already done on your Form 1040.
- Column A: Enter the amounts from your return as originally filed.
- Column B: Enter the net change (whether it’s an increase or decrease) for each line that you’re changing. This column allows the IRS to easily skim the form to determine what changes they’re looking for and if you now owe the government money or they owe you money.
- Column C: Add or subtract the increase or decrease you entered in column B from the amount you entered in column A. This is the correct amount that you need to report to the IRS. For any item you don’t change, you’ll just enter the amount from column A again.
Now that you know what the columns are for, we can talk about the lines. In total, Form 1040X has 30 lines. However, it’s unlikely that you’ll need to amend each and every one. Instead, let’s focus on the sections that are most often amended.
Income and deductions
If you’ve made any adjustments to your adjusted gross income or are adjusting your itemized or standard deductions, you will make those changes in the Income and Deductions section on page one. Line 5 is the last entry in this section, and it’s where you’ll add up any changes you made in lines 1 through 4.
As this is where Anna had made the mistake on her original 1040, we can use her as an example. Let’s say she showed $100,000 in taxable income on her original return, even though she actually had a loss of $10,000. This means that she should have originally reported an income of $90,000. However, when she was doing her books, she discovered she had additional income of $20,000.
Her Form 1040X, line 5, would show $90,000 in column A as the original amount, and $20,000 in column B to include the newly discovered income. When she adds column B to column A, she arrives at $110,000 taxable income, which is what she will record in column C. If she failed to take into account the loss she actually had on her original return, she would report $120,000 in column C, and possibly overstate her tax liability.
|Original amount||B. Net change||C. Correct amount|
Also on page one is a section that allows you to modify your tax liability. Beginning on line 6 and ending with line 9, it’s here that you can make changes to the method you used to calculate your tax — and therefore how much you owe — as well as add business credits, healthcare credits, or other taxes you may have missed the first time around. In line 11, you’ll calculate the total tax you owe.
Explanation of changes
Finally, on page two you will find Part III, or Explanation of Changes. This is completely unique to Form 1040X and is where you can provide an explanation of changes to your tax form to help the IRS better understand why you are amending your original 1040. To complement any comments you make here, you will also need to attach the revised documents you gathered in Step 2 that show the updated information.
Step 4: File Form 1040X
Once you’ve completed form 1040X, you’ll need to file it with the IRS in order for the amendments to be recorded. Unfortunately, while you may have been able to e-file your original 1040, you cannot submit 1040X for electronic processing. Instead, you will have to send a paper document in an envelope via post. Make sure you also keep a copy of your 1040X with any supporting documents.
As you must submit your amendment by post, processing times are also a bit longer than with other IRS forms. The IRS says it can take up to 16 weeks to process amended returns, but after just three weeks, you can check its status at Where’s My Amended Return? or call the IRS’s amended return phone number (866-464-2050).
Step 5: Pay additional tax or collect your tax refund
If you find that you owe the government money, pay it immediately. The IRS does not offer a grace period for tax payments, and fees begin accruing the day the balance is determined and entered into the system.
On the other hand, if you find the IRS actually owes you money, you can arrange to have it sent directly to your checking or savings account via direct deposit. Alternately, you can wait for the IRS to mail you a check, but this takes a bit longer.
Step 6: Rest easy
Congratulations! You’ve just completed and filed your form 1040X. While the process of filing an amended return with the IRS may seem daunting, it’s actually a fairly easy process — for Anna and for you.
Just be sure to have all of your revised information in hand, as well as a copy of your previously submitted federal tax return. Then you should be able to just plug in the old numbers and new numbers, and you’ll be all set.