Make the 'right call' on filing amended returns

Now that you've put your 2008 tax return to bed, you were probably hoping to rest for a while. But no such luck: You discover that you made an error on the return or omitted taxable income or a deduction.

Should you file an amended return?

Strategy: Weigh all the pros and cons. The outcome will often turn on several key factors.

For starters, it makes a big difference if you owe the IRS money or the other way around.

If you owe Uncle Sam

It's an easy call if you've paid less tax than you should have: File the amended return as soon as possible. In fact, if you're fast and lucky, the IRS won't tack on any penalties. Of course, you still need to pay the tax due, plus interest dating to the original due date.

On the other hand, if you pretend that nothing happened and the problem will simply "disappear, you're living dangerously. If the IRS gets wise, you could be clobbered with hefty penalties on top of the back taxes and interest you owe. The IRS generally has three years to audit a return (six years if the income is under-reported by 25% or more). In case of fraud, the IRS has no time limit.

The IRS may allow you to pay the difference in installments if you can't handle the full amount right now.

If Uncle Sam owes you

If the error works in your favor, it's a different story. Filing an amended return isn't necessarily the right move.

Here's why: It could cost you extra in tax preparation fees to file an amended return, plus you might attract the IRS' attention the second time around. Does an amended return increase the odds for an audit? Why take the chance if you're recovering only a small amount? Chalk it up as a lesson learned and be more careful in preparing your return.

However, if you stand to receive big bucks from the discovery, go ahead and file.

Tip: In any event, make sure the rest of your tax return is airtight.