You will need to amend your 2006 return by filing Form 1040X. There may be some additional tax due, but that should not be a huge problem unless your fiancé claimed you and your children as dependents.
Your fiancé can claim you and your children as dependents for 2007 if HE provided a place to live and more than half of your total support AND if you did not make more than $3,400 in gross taxable income. If you have earned any income, it might be better for YOU to claim your children because of the Child Tax Credit and Earned Income Credit.
Also (and I know this does not sound very romantic), you may want to get hitched on or before 31 December 2007, because then HE can claim the Child Tax Credit for your children, and you two can file JOINTLY, increasing your standard deduction from $5,300 to $10,600. That's an additional $3,000+ on the combined tax refund. Right now, he does not qualify for this credit because he is NOT their step-father. Something to think about!
If you want some tax modeling done, contact me at
[email protected] and, with your income information and a small fee, I can tell you EXACTLY what to expect come theis upcoming tax season.