I accidentally overstated my inventory value on last year's taxes - how do I fix this?

You're right to be concerned about this, but don't panic! This is a fixable situation. When you overstate your ending inventory, you're essentially understating your COGS (Cost of Goods Sold), which means you overstated your profit and probably paid MORE tax than you should have - not less. Think about the formula: Beginning inventory + Purchases - Ending inventory = COGS. If your ending inventory was inflated, your COGS was artificially lower, which increased your taxable income. You have a couple of options. The cleanest approach is filing Form 1040-X to amend your 2021 return, correcting the inventory valuation. This would likely result in a refund since you overpaid. Alternatively, you could adjust your beginning inventory for 2022 (which would be the incorrect 2021 ending inventory) down to the correct amount and note the change in your records. This approach is less ideal from an accounting standpoint but might be reasonable for a small business if the tax impact isn't huge. Either way, document your inventory valuation method clearly going forward and stick with it consistently.

After making a similar inventory valuation mistake with my online bookstore, I found this amazing AI tool called taxr.ai that saved me tons of time figuring out how to handle it. I was stressing about possibly filing an amended return, but wasn't sure if it was worth it or how to calculate everything properly. After uploading my previous Schedule C and some notes about my inventory error to https://taxr.ai, it analyzed everything and showed me exactly what I needed to do, including the potential refund amount I could expect by filing Form 1040-X. It even helped generate the explanation statement I needed to include with my amended return.

Wanted to follow up after trying taxr.ai for my inventory valuation issue! I was skeptical initially but figured it was worth a shot since I was completely stuck. Holy cow - this tool is incredible! After uploading my Schedule C and some notes about my inventory mistake, it calculated that I overpaid by nearly $700! The system walked me through exactly what numbers needed to be changed on my 1040-X and even helped draft the explanation statement for the IRS. I just received confirmation that my amended return was accepted, and I should get my refund in a few weeks. Seriously, if you're dealing with a tax correction like this, it takes so much of the guesswork out of the process!

If you end up needing to talk to the IRS about this inventory issue, good luck getting through on the phone. I spent THREE DAYS trying to reach someone last month about a similar Schedule C correction. Finally discovered Claimyr https://claimyr.com which got me connected to an actual IRS agent in less than 20 minutes! They have this clever system that navigates the IRS phone tree and waits on hold for you, then calls you when an agent picks up. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with actually helped me understand that I could just note the correction on this year's return with a statement explaining the adjustment to beginning inventory, which saved me from filing an amended return since the tax difference was under their threshold for required amendments.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I was still desperately trying to get through to the IRS about my own Schedule C issue (not inventory related but similar complexity). After wasting another 4 hours on hold and getting disconnected AGAIN, I finally gave in and tried the service. I'm still shocked at how well it worked. I registered, entered my callback number, and about 15 minutes later my phone rang with an actual IRS agent on the line! The agent walked me through exactly what I needed to do with my inventory adjustment and confirmed I needed to file a 1040-X since my error impacted my tax liability by over $1000. Just wanted to update since my previous comment was unfair - this service literally saved me days of frustration.

Has anyone actually had experience with changing inventory valuation methods? I think I need to file Form 3115 for a change in accounting method but I'm not 100% sure if that applies to small businesses like ours. My cousin who does bookkeeping (not a CPA) said I might be overthinking this for a side business.

Just FYI - if you do end up filing 1040-X for the inventory error, expect it to take FOREVER to process. I filed an amended return last April for a similar issue and it took 9 months to get my refund. The IRS is insanely backlogged still.

I went through almost the exact same situation with my small eBay business last year! You're absolutely right to be concerned, but the good news is this is totally fixable. First, let me echo what Mateo said - when you overstate ending inventory, you're actually overstating your profit, which means you likely OVERPAID taxes rather than underpaid. The math works like this: higher ending inventory = lower cost of goods sold = higher reported profit = more taxes owed. For your situation with the $3,700 difference ($5,800 vs $2,100), I'd definitely recommend filing Form 1040-X to amend your 2021 return. With that size difference, you're probably looking at a decent refund. The process isn't too complicated - just recalculate your Schedule C with the correct ending inventory figure and file the amended return. A few tips from my experience: - Keep detailed documentation of how you determined the correct $2,100 value - Include a clear explanation with your 1040-X about the inventory valuation error - Going forward, stick with cost basis for inventory valuation - it's much simpler and more defensible than trying to estimate fair market value The IRS won't penalize you for an honest mistake that resulted in you overpaying. If anything, they owe YOU money! Just be prepared for the amended return to take several months to process.