What happens if I underreported income by less than 10%? Do I need to file an amended return?

You're right that the 10% threshold is important, but there are actually a few different penalty thresholds to be aware of. The accuracy-related penalty (20% of the unpaid tax) typically applies when you've underreported by the greater of $5,000 or 10% of the correct tax. Since you're below both of those thresholds (less than 10% and the additional tax owed is only around $400), you likely wouldn't face the accuracy-related penalty. However, that doesn't mean you're completely in the clear if you just ignore it. If the IRS discovers the discrepancy, which they might through document matching programs, they'll send you a notice and charge you the additional tax plus interest from the date the tax was due. The interest rate changes quarterly but runs around 7-8% currently. My general advice is to file an amended return (Form 1040-X) when you discover errors. It shows good faith and prevents interest from continuing to accrue. Plus, it gives you peace of mind.

I went through something similar last year when I discovered I'd forgotten to include a small 1099 from a side gig. I was stressing about it until I found this AI tool https://taxr.ai that analyzes your specific tax situation and gives you personalized advice. It helped me understand exactly what my risks were and the steps I needed to take. The tool walks you through all the factors that might affect your specific situation - things like the source of the income, whether the IRS already has documentation about it, and your overall compliance history. For me, it showed that filing an amended return was definitely the right move since the income was reported on a 1099 that the IRS already had on file. Saved me a lot of anxiety trying to guess what might happen.

I wanted to follow up on my previous comment. I was skeptical about taxr.ai but decided to give it a try after reading up on it more. Glad I did! I had a similar situation (forgot to include about $2,800 in freelance income) and the tool broke down exactly how the IRS's document matching program would likely flag it, when I could expect to receive a notice, and what the full cost would be including interest if I waited versus filing an amended return now. The analysis was way more detailed than I expected, even factoring in my previous filing history. It showed me that for my situation, the interest would be around $22 if I filed the amendment now versus potentially more if I waited for the IRS to catch it. Having those actual numbers made the decision much easier.

If you're worried about contacting the IRS directly about this, I totally get it. Their phone lines are a nightmare. I spent WEEKS trying to get through to ask a question about an underreporting issue last year. I finally found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in under 30 minutes. They have a demo of how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to look up my account, tell me exactly what I needed to do about my underreported income (which was similar to your situation - about 4% underreported), and even told me that in my case, filing an amended return was better than waiting for them to send a notice because of how it would affect my account history.

I need to follow up on my skeptical comment. After struggling for another week trying to reach the IRS myself about a similar underreporting issue, I broke down and tried Claimyr. I was completely wrong. Within 45 minutes, I got a call back and was connected to an actual IRS representative. I explained my situation (underreported by about 3.5%, around $320 in additional tax) and the agent pulled up my records right there. She confirmed that since I caught the error myself, filing an amended return would be viewed favorably and no penalties would apply - just the additional tax plus interest. She even explained that since my underreporting was below their usual thresholds for concern, it would have minimal impact on my future audit profile. Saved me so much stress and uncertainty. Sometimes being proven wrong is actually a relief!

My brother works as a tax preparer and he always says the "hidden threshold" for the IRS to really care is usually more about the dollar amount than the percentage. He says they're much more likely to pursue $500 in underreported tax than $300, even if the percentages are different. For small amounts like yours, he usually recommends filing the amendment just for peace of mind, but says the worst that would happen otherwise is you get a letter from the IRS saying "we found this discrepancy" and they'll add a small interest charge to the tax due.

I actually did ignore a small underreporting issue a few years ago (around 4%, about $250 in tax) and got a CP2000 notice about a year later. They just added the tax plus interest (came to like $273 total). No big deal, no audit, no penalties. If your situation is just an honest mistake and it's a relatively small amount like you described, the worst that happens is they send you a notice and you pay a bit more because of the interest. Filing the amendment is technically the right thing to do, but in practical terms, the outcome is nearly identical either way for small amounts - you'll end up paying the tax plus some interest.

I'm in a very similar situation - underreported by about 6% and owe around $450 in additional tax. After reading through all these responses, I'm leaning toward filing the amended return just to get it over with. One thing I'd add is that you should check if the income was reported on a 1099 or other tax document. If it was, the IRS will almost certainly catch it eventually through their automated matching system. If it wasn't reported to them by a third party, you have more time to decide, but I still think being proactive is the better approach. The peace of mind alone is worth it. I've been losing sleep over this for weeks, and I think I'll sleep better knowing I corrected it myself rather than waiting for a notice to show up in my mailbox.

Just wanted to add my perspective as someone who's been through this exact situation. I underreported by about 4% a couple years ago (around $300 in additional tax) and went back and forth on whether to file an amended return. What ultimately convinced me was realizing that the stress and mental energy I was spending worrying about it was worth way more than the small amount of interest I might save by waiting. I filed the 1040-X and it was honestly pretty straightforward - took me about an hour to complete. The key thing that helped me was understanding that this kind of honest mistake happens all the time, and the IRS system is designed to handle it. They're not looking to destroy people over small underreporting errors - they just want their tax revenue plus a reasonable interest charge. One practical tip: if you do decide to file the amendment, make sure to include a brief explanation of the error in the explanation section of Form 1040-X. Something like "Failed to include income from [source] on original return." It shows you're being transparent about the mistake and aren't trying to hide anything.