If you’re concerned about a tax audit and its consequences, you’re not alone. Failing an IRS audit may lead to penalties related to your tax return. Though it can be a stressful situation, the impact of a tax audit doesn’t always result in disaster.
The probability of facing an audit is low. In 2021, out of over 160 million tax returns filed, only 0.4% were audited. That’s roughly 4 audits for every 1,000 returns filed. Still, it’s important to be prepared for what could happen if you encounter issues during an audit.
Understanding your rights during audit representation and compliance with tax preparation rules can reduce stress. Taking steps to ensure accurate tax filings helps avoid unnecessary complications.
IRS Audit Consequences
What Happens If You Fail an IRS Audit?
If you’re audited by the IRS and don’t pass, it’s not the end of everything, though it can feel overwhelming. The thought of an IRS audit can be daunting, especially when you’re uncertain about the consequences. You may wonder what happens if you fail, but understanding the process can ease your worries.
The result of failing an IRS audit largely depends on what the IRS determines during the review. If mistakes are found in your tax return, penalties will be applied. In extreme cases, tax evasion or fraud could lead to jail time. To protect yourself, consider seeking professional assistance for audit representation.
The IRS usually audits returns from the last three years, but it can extend to older years if needed. If it discovers discrepancies, they can go back up to six years for further review. The audit timeline varies depending on how complicated your case is, so prepare for it to take some time.
Failing an audit often results in a higher tax bill. The IRS will adjust your return and collect the unpaid taxes. On top of penalties, you’ll also be charged interest on the overdue taxes. However, jail time is not a given unless there’s evidence of intentional fraud.
Not all audits lead to penalties, though. If you can explain the items under review, the IRS may close the audit without imposing fines. But if you don’t have receipts to support your deductions, the IRS will usually disallow them, though they may allow you to reconstruct the expenses.
What Happens If You Owe Money After an IRS Audit?
If the IRS audits you and determines that you owe money, you will be notified through a formal correspondence outlining the additional taxes, penalties, and interest that are now due. This notice will also specify a clear deadline by which you must pay. Ignoring the deadline can lead to further consequences, including escalating penalties and interest. It’s crucial to address the issue promptly to avoid additional stress or complications.
If you agree with the findings of the audit, you’ll need to sign the examination report or a similar form, depending on the type of audit conducted. By signing, you acknowledge that you accept the IRS’s assessment of your tax situation. If money is owed, you can choose from various payment options, such as lump-sum payments, installment agreements, or even offers in compromise. Understanding these options can help you manage your financial responsibility without overwhelming yourself.
If you disagree with the IRS’s audit findings, you have the right to request a conference with an IRS manager. This meeting allows you to discuss and potentially resolve any disputes over the audit results. Additionally, if there is sufficient time left within the statute of limitations, you can file an appeal to challenge the findings. However, before pursuing this route, it is highly recommended to seek professional IRS tax audit representation, like a tax attorney, who can offer expert advice and guide you through the process while ensuring your interests are protected.
Repaying the IRS After an Audit Is Finalized
The IRS offers taxpayers a variety of ways to pay any taxes, penalties, and interest they owe. Your notice will specify the payment deadline, so it’s important to act promptly to avoid additional charges. One convenient option is IRS Direct Pay, which allows you to securely pay directly from your checking or savings account without any fees or prior registration. This makes it easy to settle your tax liabilities quickly and securely.
In addition to Direct Pay, you can also make payments online using a debit or credit card. If you prefer not to pay electronically, you can mail a check to the IRS at the address listed on your notice. Alternatively, you can bring your payment to a local IRS office. Be sure to make checks payable to the Department of Treasury to avoid any issues with processing your payment.
If you’re unable to pay the full amount owed, you can apply for an installment plan with the IRS. This allows you to make smaller, manageable payments over time instead of paying everything upfront. Keep in mind that a setup fee will apply to any agreement lasting more than 120 days. You can apply for a payment plan easily online, by calling the official number on your notice, or by visiting your local IRS office in person.
For a smooth and efficient tax experience, consider seeking professional tax preparation assistance to ensure all aspects of your filing are handled correctly. A tax professional can help you navigate the IRS payment options and ensure that you’re meeting your obligations accurately, saving you time and stress.
What Happens If You’re Found Guilty of Tax Evasion in an IRS Audit?
If the IRS audits you and determines you are guilty of tax evasion or avoidance, the repercussions can be quite serious, including fines that can reach up to $100,000 and a felony conviction under Section 7201 of the tax code. However, it’s important to note that a simple mistake on your tax return, such as an unintentional error, will not be classified as tax evasion. The IRS reserves its tax evasion charges for cases where there is clear evidence of intentional misconduct to avoid paying taxes. This makes it crucial to be diligent when filing your taxes to avoid accidental errors that could trigger an audit.
To convict someone of tax evasion, the IRS must prove two key elements: first, that there is an outstanding tax liability, and second, that the taxpayer deliberately took actions to evade their tax obligations. These actions may include things like filing false tax returns, hiding income, destroying or altering important financial records, maintaining fraudulent books, or transferring assets to another person’s name to shield them from IRS detection. In such cases, the IRS will closely scrutinize your financial history to uncover any attempt to conceal taxable income. If convicted, the penalties can be severe, including up to five years in prison for tax fraud. This highlights the importance of being transparent and honest in all financial dealings to avoid potentially life-altering consequences.
Is It Possible for the IRS to Arrest You?
IRS auditors are not law enforcement officers, and they do not have the authority to arrest you. However, the IRS employs special agents who specialize in reviewing cases where criminal tax fraud is suspected. These special agents are empowered under Section 7608 of the Internal Revenue Code to make arrests if they find evidence of criminal activity related to taxes.
Arrests by IRS special agents only occur in cases where there is clear evidence that criminal tax fraud has taken place. For the majority of taxpayers, the threat of arrest is unlikely, as most audits are administrative and focus on correcting tax discrepancies rather than investigating criminal activity. However, it’s still crucial to comply with IRS requirements to avoid any situations that could escalate into more serious legal issues.
Can the IRS Imprison You?
The IRS cannot send you to jail simply for failing to pay your taxes or for being unable to do so. Jail time only becomes a possibility if criminal charges are filed against you, and you’re prosecuted and sentenced through the court system following a thorough criminal investigation. The IRS itself does not have the authority to unilaterally send you to jail for unpaid taxes.
Criminal charges typically arise in cases of tax fraud, tax evasion, or other intentional violations of tax laws. If the IRS suspects criminal activity, it will initiate an investigation, and if warranted, refer the case to the Department of Justice for prosecution. However, for most taxpayers, this situation remains unlikely unless there is deliberate wrongdoing. It’s essential to understand your rights and responsibilities to avoid actions that could lead to severe consequences.
IRS Audit Penalties and Fees
Frequent Causes of IRS Tax Audit Penalties and Fines
Determining the exact IRS audit red flags can be challenging, as the agency does not openly disclose the specific criteria used to select taxpayers for an audit. The lack of transparency often leaves taxpayers uncertain about why the IRS selected them, leading to unexpected audit penalties. However, some factors can increase your chances of an audit and penalties.
The IRS often selects taxpayers for an audit due to significant discrepancies or errors on their tax return, like unreported income or exaggerated deductions. Additionally, frequent or large business expenses, unusually high charitable contributions, or inconsistent information reported by third parties, like employers or financial institutions, can also raise suspicion. It’s important to be thorough and accurate in your tax filings to avoid attracting unnecessary scrutiny and the potential for costly penalties.
Not Responding to an Audit Notification
You can’t simply ignore an audit and hope it goes away. Some individuals mistakenly believe that ignoring an IRS audit will cause it to disappear, but this approach only worsens the situation. If you think that not responding will somehow resolve the issue, you’re only setting yourself up for more complications and serious consequences.
So, what happens if you fail to respond to a tax audit? The IRS audit notice you receive will include a specific deadline by which you must respond. Ignoring this and subsequent notices will cause you to lose the right to dispute the audit in Tax Court. Once you forfeit this right, the IRS will have the authority to make final decisions regarding your tax liability, and they will begin collecting any additional taxes owed, along with penalties and interest. In such a scenario, it’s crucial to seek professional help from an IRS audit attorney to guide you through the process and protect your rights.
Underestimating the Tax You Owe
Estimating your tax liability involves making predictions, and it’s possible to underestimate how much you actually owe to the IRS. To ensure you’re meeting your tax obligations, taxpayers must either withhold the correct amount of tax or make quarterly estimated payments, as this amount must be calculated ahead of time. If the estimates are off, it can result in penalties.
The IRS imposes penalties when you underpay your taxes, whether due to incorrect estimates or insufficient tax withholding. To avoid facing these penalties, individuals must pay either 100% of the previous year’s tax or at least 90% of the current year’s tax liability. Failing to meet these requirements could lead to significant fines, highlighting the importance of making accurate estimates and staying current on payments throughout the year.
Unsubstantiated Deductions
You’re entitled to take the deductions you’re eligible for, but it’s essential to follow the rules carefully. Deductions that seem unusual or excessive can raise red flags, potentially leading to an audit. The IRS imposes penalties if you’re unable to justify any deductions you claim on your tax return.
If you’re audited, you will have the chance to provide supporting evidence for the deductions you’ve made. As long as you have receipts, invoices, or other documentation to back up your claims, you can usually avoid penalties. Keeping thorough records is key to ensuring that you’re protected if the IRS questions any deductions on your return.
Penalties for IRS Audits
The IRS audit penalties you could face will vary depending on the severity of your tax issue. Fortunately, you won’t need to calculate the penalties yourself—the IRS will clearly specify the exact amount you’re required to pay. This transparency helps taxpayers understand their obligations and what they owe.
The IRS imposes penalties with a defined purpose, which is to promote voluntary compliance with tax laws. The Internal Revenue Manual’s Penalty Handbook explains that these penalties aim to educate taxpayers on the importance of following tax rules and the consequences of not doing so. By setting clear penalties, the IRS aims to encourage taxpayers to stay compliant and avoid costly mistakes.
Penalties for Inaccurate Information
If the IRS adjusts an amount reported on your tax return, leading to an increase in your tax liability, they may apply a penalty to that increased amount. This penalty can range from 20% to 40% of the additional taxes owed, depending on the specifics of the adjustment.
The penalties the IRS imposes for questions regarding the accuracy of your return depend on various factors, such as significant underreporting of taxes, substantial misstatements in valuation, transfer pricing issues, negligence, or ignoring tax rules and regulations. The more serious the issue, the higher the penalty could be, which underscores the importance of ensuring your tax return is accurate and compliant with all regulations.
Penalties for Tax Evasion
Filing a false tax return constitutes tax fraud, and the IRS treats it as a criminal offense. Taxpayers convicted of fraud, or those who assist others in committing fraud, may face severe consequences, including the forfeiture of property and even potential jail time.
While the IRS identifies and investigates tax fraud cases, it’s the Department of Justice that handles the prosecution. The process for conviction and sentencing goes through the court system, where a judge determines the appropriate penalties. If convicted, taxpayers can face significant tax fraud penalties, which vary depending on the specifics of the case and the severity of the fraudulent actions.
Penalties for Failing to Submit
The IRS imposes this penalty if you fail to file your tax return by the due date. In this case, the IRS will assess a late filing penalty on the unpaid tax balance. The penalty is typically 5% of the unpaid tax amount for each month the return is late, with a maximum penalty cap of 25%.
Additionally, there may be a minimum penalty of $435 for late filing if your income tax return is more than 60 days past due. Alternatively, the penalty could be 100% of the tax due, whichever amount is smaller. It’s crucial to file your tax return on time to avoid these penalties and keep your tax situation in good standing.
Need Assistance Handling an IRS Audit Penalty?
Facing IRS audit penalties and uncertain about how to proceed? Contact us today for professional tax assistance. At Austin & Larson Tax Resolution, we specialize in representing clients in tax matters, with a successful track record of negotiating audit reconsiderations and reducing or removing penalties. Trust us to help you navigate the process and safeguard your financial future.
Conclusion
Failing an IRS audit can lead to significant consequences, including penalties, interest, and, in severe cases, criminal charges. If the IRS finds discrepancies on your tax return, expect a higher tax bill and potential penalties. In extreme cases, intentional fraud could lead to jail time. However, most audits result in adjustments, not criminal charges.
The audit process can span several years, and failing to respond to audit notices only worsens the situation. Ignoring payments or underestimating tax owed could increase penalties. It’s essential to be accurate and timely in your tax filings to avoid penalties, such as those for unsubstantiated deductions or late filings.
Seeking professional help is crucial if you’re facing a tax audit or penalties. Expert tax professionals can guide you through the process, help manage your liabilities, and protect your rights.
FAQs
How can I avoid getting audited by the IRS?
Maintain accurate records, report all income, and avoid exaggerated deductions.
Can I negotiate IRS audit penalties?
Yes, you can request penalty relief or an offer in compromise if eligible.
How long do I have to respond to an IRS audit notice?
Typically, you must respond within 30 days of receiving the notice.
What documents should I keep to prepare for a tax audit?
Save receipts, invoices, bank statements, and proof of income for at least three years.
Does hiring a tax professional help during an audit?
Yes, a tax attorney or CPA can guide you, negotiate penalties, and represent you with the IRS.
Users Also Say
What happens if we fail an income tax audit?
M****p
“If you fail to file your Income Tax Audit Report: you will have to pay a penalty of 0.5% of total sales or gross receipts. Forms to be filed in Tax audit: Form 3CA/3CB – provides basic details about the auditor and assessee. Form 3CD – detailed audit report.”
Ri***Go***ll
“You are not given a pass of fail grade. After verifying income, credits, and deductions you will get a revised total of what you owe. It could be from a few dollars to a few thousand dollars. You also may be charged penalties and interest. If you are doing something stupid like claiming a hobby for a business’ or claiming 10 pets as deductions you could also be charged criminally. The IRS can and will put liens on assets, and accounts to collect their money!”
Is**** R***ni
“Failing an income tax audit can result in penalties, interest on unpaid taxes, or legal consequences. The tax authority may disallow expenses, leading to higher taxable income and tax liability. Repeated non-compliance can trigger more frequent audits. In severe cases, it may lead to prosecution for tax evasion. To avoid such outcomes, maintain accurate records, ensure timely filings, and address discrepancies promptly during the audit process.”
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