Amending prior year tax returns

I recently determined that I have underreported income on my tax returns going back to 2004. The amounts are not that significant, about $4,500 per year. I would like to correct this problem. Do I need to amend all my tax returns going back to 2004? Can you help me determine what to do?

Your honesty should be commended. My anecdotal evidence indicates that people only want to amend their tax returns when their error has resulted in them paying too much tax on their return, not paying too little.

For most instances, the statute of limitations on a federal tax filing is three years. As such, the Internal Revenue Service can assess additional tax on a taxpayer for a period of three years after the tax return has been filed. This would mean that you would file an amended tax return for the tax years 2008, 2007 and 2006. Assuming that you filed your tax return for 2005 by the filing deadline of April 15, 2006, the statute of limitations has already expired on this tax year and you would not amend this tax return. (However, if you extended the tax return that year and did not file the return until the deadline of October 15, 2006, you may still consider amending your 2005 tax year as the statute of limitations is open for another two months.)

As is always the case there are some exceptions to this rule. If the amount of gross income you failed to report to the IRS is in excess of 25% of the amount of gross income stated in the tax return filed with the IRS, then the statute of limitations is extended to six years. For your case, if your gross income was approximately $18,000, there is a possibility that you would also need to amend your 2005 and 2004 tax returns.

Also, the statute of limitation does not apply in the case of a fraudulent tax return filed with the IRS with the intent to evade any tax. The IRS would have to prove that this was the intent. Since you are trying to rectify this problem, it is pretty clear that your intent was not to evade taxes.

It is important to understand the starting date for running the statute of limitations is the day you file the tax return. For those who fail to file a tax return, the clock on the statute does not begin and thus the IRS can open tax years much further back in time.