Sam Brotman, JD, LLM, MBA October 21, 2020 21 min read

IRS Audits: Frequently Asked Questions

What Type of Penalties Could I Face in an Audit?

The penalty structure in an audit can range anywhere from five percent, all the way up to a 75 percent. It depends on the conduct and the course of dealing during the audit and how the material is presented. The most common penalty is the negligence penalty, which is about 20 percent.

If at all possible, you want to avoid that negligence penalty and knock this thing down to an accuracy penalty, which is about 10 percent. An accuracy penalty is usually the best-case scenario because the accuracy penalty is mandatory for adjustments that are $5,000 or greater.

For more serious cases, the goal in the audit is to mitigate the civil fraud penalty, which is 75 percent. In addition to the 75 percent penalty on top of the tax that you owe, civil fraud prevents certain resolutions within IRS collections. 

That is why it is really important to avoid the stigma of fraud going forward in your IRS matter. In the event that a civil fraud penalty is issued, the most likely course of action is an IRS appeals. 

One of the important things to think about when you are hiring a representative or when you are making the decision on who to represent you in the audit, is how you are going to deal with the issue of penalties and mitigate them as much as possible.


What If There Is a Serious Error on My Return and I Get Audited?

If there is a serious error on the tax return, the first thing you do is you need to get an attorney, not a CPA, and not a tax preparer. The reason you need an attorney is a serious error on the return carries heavy penalties including criminal liability and/or at least what we call a civil fraud penalty. 

You need an attorney to be able to communicate the full extent of the error and because an attorney's communication is protected under attorney-client privilege. You do not have that same relationship with your CPA or with another tax preparer. 

Once you identify the error, determine whether or not the auditor is going to catch it. If the error is fairly obvious, then you are better off admitting it to the auditor and avoiding the willfulness penalties or avoiding the impression that there is any fraud.

If the error was a simple mistake and there is no criminal liability, then the decision needs to be made on whether or not you are going to disclose that to the auditor or not. If you do not disclose it to the auditor and the auditor catches it later, there could be consequences in the terms of penalties. 

However, if you get out in front of the issue and disclose it, although you are on the hook for whatever the taxable adjustment is as a result of the error, you may be able to leverage it to your advantage. 

Serious errors are no laughing matter. It is important that you deal with it, honestly and appropriately before the IRS makes the decision on what your ultimate disposition is.


What Happens If I Owe Money to the IRS After the Audit?

If you owe money at the end of an IRS audit, it is like owing liability on your taxes. 

You can:

  • Pay the liability in full,
  • work out a payment plan, or
  • go in collections and work out a resolution.

Most of the time the auditor will close the audit and a bill will get issued. If you do not appeal that bill, you will go directly into collections. The best thing to do is to speak with the auditor and see if you can negotiate a straight hand-off to collections. 

It is not possible in all cases, particularly where the liability is small, but if you discuss things with the auditor, they may be able to shortcut the process into collections and work out a resolution of the liability. 

This also tends to happen in cases where there are large dollar amounts due at the end of the audit. The auditor will pass you off to a revenue officer. You will start working with that revenue officer immediately to try and collect the liability.

In either case, if you owe money, do not worry. There are a lot of things that you can do on the IRS's side to mitigate that liability and to work out terms that you can potentially deal with.


What Happens If I Get Audited and Don’t Have Receipts?

If you do not have substantiation, do not panic because there are many ways to validate an expense. What the IRS code technically requires is that in order to take a business expense, for example, the expense has to be incurred in the tax year and it has to be ordinary and related to the business.

Technically, in order to prove that the expense was incurred in the tax year, the code does require receipts. But the phrase that we use around the office is — we like to point to the integrity of data.

One of the best things that you can do if you are missing receipts or if you have other substantiation issues, is to just try to build a body of work.

For example, if you do not have any receipts, go through your bank statements, identify the charges that you do have and show the supporting charges. If you have expenses on there that are like from Target or from the grocery store, those could be questionable. 

You might want to leave those expenses off because as long as you can substantiate things to a reasonable perspective and do your best to tie the expenses in, there are a lot of things that you can do to get credited for those categories, even when you are lacking documentation.


What Is the Brotman Law Strategy in an IRS Audit?

The strategy that we have in the firm for IRS audits is essentially what I call, see the playing field. It is really important in an IRS audit to understand what you are dealing with going into the audit. When we look at a return in the context of an audit, we are constantly trying to figure out what about this return is special? Why did it get audited? Where does the IRS see the large propensity of an adjustment?

In doing that and identifying the areas we think are at most risk, that is where we devote our focus and attention to the audit. We certainly want to prepare for everything, but by concentrating on the areas that we believe the auditor is going to focus on, we can help mitigate a lot of the client's risks.

The goal is to control the scope of information and make as good of a presentation as possible to the auditor in order to get out of the audit as quickly as possible. We are trying to maximize efficiency, we are trying to minimize risk, and we are trying to conclude the audit as quickly as we can. That is the way our firm handles IRS audits.


Can I Go to Jail for Errors on My Tax Return?

Yes, you can, but with the caveat that most people do not go to jail because of errors on their return. Criminal prosecutions take willfulness. There has to be some deliberate action on your part to mess with the return or to conceal income or hide expenses in some way. 

If there is no evidence of willfulness, prosecution is probably not likely. In the course of the investigation, the auditor is looking for things called badges of fraud. They are looking for evidence that you manipulated the numbers on your return in order to lower your taxable liability.

If the errors are serious enough, it will trigger a referral to the Criminal Investigation Division (CID) of the IRS. While the chances of jail are not likely, if you have a serious error on the return and the IRS suspects willfulness, it can and will trigger a criminal referral, which is something that you do not want to deal with.

Criminal matters are very difficult to deal with, and they cause a lot of problems having a CID agent investigating your file. The easiest thing to do is defeat the presumption that there is any willfulness associated with the error and move past the issue as quickly as possible during the audit.


If I Amend My Taxes, Am I More Likely to Get Audited?

Yes, unfortunately you are. By amending your taxes, you are going ahead and admitting that a mistake was made on the original return. It could be an innocent mistake or it could be a not so innocent mistake but highlighting that for the government means that there is an error on the return. 

The good news is that if you identify the error, take steps to correct it and attach an explanation to the amended return, it can be sufficient. Once it gets to the human reviewer, the human review would probably look it over and say, “Oh, I understand what happened,” and they might move on. 

Consequently, if there are significant adjustments or errors, then the amended return might fall under some scrutiny. You take the risk when you amend returns by highlighting things for the government and potentially dragging yourself into an audit.

This is particularly true when you are amending multiple years of returns. However, I would not say that should stop you from amending returns, even if you are increasing your audit risk. There are certain ways to present amended returns that will fall under less scrutiny. 

At the very least, the attorney can help you understand how to reduce the likelihood an examination is going to pick up that issue. This is what I would recommend when you are dealing with an amended return situation.


If I Get Audited, What Is the Likelihood I Will Get Audited Again?

It depends. The first thing it depends on is what are you being audited for? Are you being audited for a one-off mistake? Are you being audited for a serious under-reporting of income or an overstatement of deductions? What is the issue? 

Based on how the audit goes, what is the correction? Is it a substantial correction? Is it a minimal correction? Are you getting penalized? Were there fraud issues involved? Audits are meant as a check. Again, the IRS is verifying that the story you are telling the government is an accurate story.

If there is a reason for the government to believe that the same story may continue in the future, then you will probably pop back up on the IRS's radar again. If you have a history of noncompliance, if you are under-reporting cash or something like that, the IRS will probably take a look at the return. 

Understand that the IRS operates largely on statistics. They will compare the return that was audited and the adjustment that was made to a later year’s return. If there are any similar issues on that return to the first return, the IRS will decide whether or not they want to perform an audit.

If you go through an audit, you should have learned a painful lesson and it will be an experience you will never want to repeat. 

The best thing that you can do to protect yourself from being audited again is to learn from your mistakes the first time and to minimize those mistakes going forward in the future.


Can I Just Pay the IRS and Get Them Off My Back?

No, because it does not work like that. If you are selected for an audit by the IRS, then they want to do an investigation to some varying degree into the information that you have reported on your tax return. Not complying with that investigation or trying to obstruct it in any way by not responding to the auditor or doing any number of things to impede their investigation, or just calling them up and saying, “Send me a bill,” is not a good strategy.

Number one – if you call the auditor up and ask them to send you a bill, then they are going to disallow everything that they could possibly disallow. They’ll send you the largest tax bill that they can in order to protect the interests of the government. It is not like they are just going to say, "We are going to limit it to this issue." 

They are going to disallow everything because they do not have any basis or any support. By doing that, you are cruising for a much higher liability than you are probably entitled to.

Number two – if you have a complicated issue or if there is something that the IRS really feels is there. For example, if you do not report $30,000-$40,000 on a tax return for income, then the IRS is not just going to let it go. There are penalties involved with the unreported income. There are penalties involved with overstating deductions. The IRS is not just going to say, "Well, if we catch you, go ahead and mail us a check and everything will be fine." No, the IRS is about compliance.

If you do not comply with the tax laws by filing returns that are inaccurate or if you are overstating things or understating things, the IRS is going to punish you. It is not something that is just as simple as writing a check and being done with it. You have to play ball with the audit whether you want to or not.

The IRS Expects Voluntary Compliance, No Less and No More

If we lived in a perfect world where everyone filed an honest and accurate tax return every year, there would still be reasons for the IRS to perform audits occasionally.

Voluntary compliance was introduced by the government because filing taxes for every US person would be too much work for the IRS on its own. Making sure each return was trustworthy would be difficult as well.

The government elected to work on assumption, deciding to trust that individuals and businesses would pay the right amount of taxes, do it in the proper manner, in the time frame allotted.

But we don’t live in a perfect world. Some individuals and business owners try to pay as little as possible on their tax returns, hiding streams of income or taking deductions they aren’t entitled to. We also know that our government and the IRS aren’t perfect either. It too can be accused of greed, making mistakes or sweeping things under the rug.

The point is, if you’re being audited, there’s a lot of room for discussion. Once we get down to brass tacks, whether the mistake is yours or not, it’s best to get on with dealing with the issues on the return, getting the proper forms filled out, and finally making a settlement with the IRS in order to move on with your life. 

That’s what I do and will help you to do when you decide to have the Brotman Law firm evaluate and help you to resolve your IRS audit.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law



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