What Happens When You Forget to Report All Your Income to the IRS?

Humans are prone to mistakes, with some mistakes seeming a bit worse than others. For example, forgetting to add dill to a cucumber salad may be irritating, but it's no big deal. Forgetting to include income while filling out a tax return feels much larger. The good news is this: Tax-related mistakes can easily be corrected. Here's how.

When it's you who realizes you've forgotten to include income

Imagine that you've filed your tax return for the year, and you're pretty pleased with yourself. You're nearly asleep one night when you suddenly remember a small bonus or extra paycheck that you forgot to include on your return. You spend the next hour worrying about the odds of being audited and how much this little snafu will cost you.

The IRS processed more than 162 million tax returns last year. One mistake on a single return is unlikely to set off alarm bells in IRS headquarters.

Despite stories to the contrary, the IRS is not out to get anyone. The agency simply counts on taxpayers to be as honest as possible and to take care of mistakes when they're made. As soon as you realize there's a mistake on your return, you can make it right by using Form 1040-X, Amended U.S. Individual Income Tax Return. A full set of instructions should walk you through the process, but if you're concerned and have questions, you can call the IRS at 800-829-1040 for answers 24 hours a day.

By the way, this advice applies to more than forgetting to add income. If you suddenly realize that you've left something off your return, used the wrong filing status, or claimed a credit you weren't entitled to, filling out Form 1040-X is the best first step.

Pro tip: Your best bet is to wait until you receive all the documentation you need to file taxes correctly. For example, if you're employed, wait for your employer to provide you with a W-2, and if you're a freelancer, wait for those 1099-MISC forms to roll in. While it may be tempting to estimate your income based on check deposits (or memory), it's easy to forget something without the forms you need right in front of you.

When the IRS finds the mistake

Let's say you operate a home daycare and forgot to include income for a child you only watched for a few weeks. It's possible the IRS will flag that error when the child's parents file it as a child and dependent care expense. In that case, the IRS is likely to amend your return to include the income and adjust your taxes due accordingly.

Once the IRS has flagged a mistake or made an adjustment to your return, it will send you a notice letting you know what it has done. You have the right to agree with their action or to appeal the decision.

Given the fact that 16% of Americans believe it's okay to cheat on their taxes, it's easy to believe the relationship between the IRS and taxpayers is adversarial, but that's generally not the case. Not only will the IRS let you know it's caught a mistake, it will tell you what you need to do to appeal its findings. In other words, the IRS is just trying to get it right.

Pro tip: You have every legal right to appeal an IRS decision and should appeal if you believe the tax agency has gotten it wrong. However, if you're counting on a refund, keep in mind that an appeal will slow the speed at which it hits your bank account.

The U.S. tax system is famously complicated, and the IRS is aware that we sometimes make mistakes. The best thing you can do when you've discovered an error is to take steps to make it right.