The Complete Guide to IRS Collections

You could be looking at any number of IRS audit penalties depending on the scale of the tax problem you have.

IRS Audit Penalties: What Happens if You Get Audited & Fail?

You’re worried about what happens if you get audited and fail. It won’t be the end of the world but you may face some IRS audit penalties as a result of issues with your tax returns. Audits can be a scary experience to go through.

The chances of being audited are slim. Of the over 160 million individual income tax returns that were filed in 2021, the IRS only audited 0.4%. That’s 4 out of every 1,000 returns. Nevertheless, it’s always best to know what can happen if you get audited and fail.

What happens if you get audited and fail?

If you get audited by the IRS and fail, it’s not the end of the world. Getting audited by the IRS can already feel like a nightmare. You might not know what happens if you fail an IRS audit and you’d hoped that you never have to find out. 

What will happen if you fail the audit depends largely on what the IRS has assessed. It will impose tax penalties if errors are found in your tax returns. There's also the possibility of jail time in serious cases of tax evasion and tax fraud

The IRS may normally flag one return for audit but it does have the authority to audit returns from the past several years. Typically , it will audit your returns from the past three years but if additional discrepancies are discovered, it can review returns from the past six years to make an assessment. The audit timeline will depend on the complexity of your case. See FAQ section for more information on the audit process timeline.

Generally, if you fail an audit, you get hit with a bigger tax bill. The IRS finds that you didn't pay the correct amount of taxes so it utilizes the audit to recover them. In addition to penalties, you're required to pay the additional taxes as well as the interest on those taxes. This does not mean you’ll end up in jail. 

Not all IRS audits will result in a penalty. If you're able to justify the items being reviewed on your return, the IRS will conclude the audit without imposing any charges or penalties. What happens if you get audited and don't have receipts to make justifications? The IRS will typically disallow the deduction but the auditors do provide some leeway for the reconstruction of expenses.

Common reasons for IRS tax audit penalties and fees

Figuring out the IRS audit red flags isn't simple since they don’t disclose the precise reasons behind why a taxpayer may be selected for an audit which ultimately leads to a tax audit penalty. However, there are a few common reasons why you might find yourself on the hook for penalties and fees.

Not responding to an audit notice

You can’t wish away an audit. Some people believe that ignoring IRS audit will make it go away but that couldn’t be further from the truth. You’ll end up creating more problems for yourself if your idea is to just not respond in the hope that the audit will take care of itself, or better yet, never followed up.

So what happens if you don't respond to a tax audit? The audit notice that you receive from the IRS will have a deadline for you to respond. If you keep ignoring subsequent notices, you could lose your right to dispute the audit in Tax Court. The IRS will then be able to decide all of the issues against you and begin the process of collecting additional taxes, penalties, and interest. If this turns out to be the case, you should call an IRS audit attorney to help you out.

Underestimating the amount of tax due

Estimations are based on predictions and you may underestimate the amount of tax that you owe to the IRS. Taxpayers are required to withhold tax or make quarterly estimated tax payments as this amount has to be estimated. 

The IRS imposes penalties for amounts that are below estimates or have too little tax withheld. Individuals have to pay either 100% of the previous year's tax or 90% of the current year's tax to avoid an underpayment penalty.

Deductions that you're unable to justify

You're allowed to take deductions that you're entitled to but it's important to be mindful of the rules. Deductions that appear out of the ordinary can trigger an audit and the IRS imposes penalties for deductions that you're unable to justify.

You’ll be provided with an opportunity to justify the deductions that you’ve claimed on your tax returns. As long as you have receipts and other documentation to support the claim, you’ll most likely be able to avoid the penalty.

IRS audit penalties

You could be looking at any number of IRS audit penalties depending on the scale of the tax problem you have. But you won’t have to calculate the IRS audit penalty on your own. They will tell you exactly how much you’re on the hook for.

There's a defined purpose for which the IRS charges penalties. According to the Internal Revenue Manual’s Penalty Handbook, the purpose of these penalties is to encourage voluntary compliance by informing taxpayers about compliant behavior and the consequences they would face for non-compliance. 

  1. Accuracy related penalties
    If an amount reported on a return is later adjusted and results in a tax increase, the IRS may assess a penalty on that amount. This penalty can range between 20-40% of the tax increase. 

    How much are IRS penalties in matters where the accuracy of the return is called into question depends on various tax issues such as considerable understatement of tax, significant valuation misstatements, transfer pricing adjustments, negligence, or disregard of rules or regulations.

  2. Tax fraud penalties 
    The filing of a false tax return is considered to be fraud by the IRS and it's a criminal offense. Taxpayers who are convicted of fraud or of aiding another taxpayer in committing fraud may be subject to forfeiture of property and possibly even jail time

    The IRS doesn't prosecute tax fraud cases, the Department of Justice does. The process for a taxpayer's conviction and sentencing goes through the court system. If convicted, the taxpayer can be hit with tax fraud penalties based on the nature of their tax case.

  3. Failure to file penalties
    This penalty applies when you don't file your tax return by the due date. The taxpayer's tax balance will thus be assessed a late filing penalty. It's 5% of the amount of unpaid tax per month the return is late but capped at a maximum of 25%. 

    There may also be a minimum penalty of $435 for late filing of an income tax return. That's if your return was over 60 days late or 100% of the tax required to be shown on the return, whichever is less.

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What happens if you get audited and owe money?

If you get audited by the IRS and owe money, you’ll be notified of the additional tax that you’re required to pay as well as any penalties and interest due. The correspondence that you receive from the IRS will mention a deadline by which you must pay.

If you agree with the audit findings, you'll have to sign the examination report or a similar form based on the type of audit that was conducted. If money is owed to the IRS, you can utilize several payment options to settle your liabilities.

If you disagree with the audit findings, you can request a conference with an IRS manager. If there is enough time remaining on the statute of limitations you can file an appeal. It would be best to engage professional IRS tax audit representation through a tax attorney before doing that.

Paying back IRS after audit concludes

The IRS provides taxpayers with several different ways to pay any taxes, penalties, and interest they're liable for. The deadline by which payment needs to be made will be mentioned on your notice. It offers several electronic payment options that you can use to pay the amount due in full. This includes IRS Direct Pay which lets you securely pay taxes directly from a checking or savings bank account without any fees or pre-registration. 

Payments can be made online using a debit or credit card as well. A check can also be mailed to the IRS at the address listed on your notice or you can simply bring it to your local IRS office. The checks should be made payable to the Department of Treasury.

You can apply for an installment plan with the IRS if you're unable to make the payment in full. It will allow you to make smaller periodic payments over time but a setup fee will apply to all agreements over 120 days. You can apply for a payment plan online, by calling on the official number on your notice or in person at your local IRS office.

What happens if you are audited and found guilty of tax evasion?

If you are audited and found guilty of tax evasion or tax avoidance, you may face a fine of up to $100,000 and be guilty of a felony as provided under Section 7201 of the tax code. A simple mistake in a tax return won’t be considered tax evasion

For you to be convicted of tax evasion, the IRS must be able to prove that you have an unpaid tax liability and that you intentionally took actions to evade taxes. This may include the filing of a false tax return, concealment of income, destruction of relevant records, keeping a double set of books, placing assets in the name of others, etc. If convicted, the tax fraud jail time you’re sentenced to can be no more than five years.

Can the IRS arrest you?

IRS auditors aren't cops and they won't arrest you. However, the IRS does have special agents that analyze information to determine if criminal tax fraud may have occurred. Special agents do have statutory authority to make arrests as provided by Section 7608 of the Internal Revenue Code.

This only happens in circumstances where the IRS suspects criminal activity on behalf of the taxpayer. Most taxpayers won’t find themselves in a situation where the IRS may need to arrest them. 

Can the IRS send you to jail?

The IRS can't send you to jail for failing or being unable to pay your taxes. You'll only be looking at jail time as a result of tax law violations if criminal charges are filed and you're prosecuted and sentenced through the court system after a thorough criminal investigation. The IRS doesn't have unilateral authority to directly send you to jail.

Need help dealing with an IRS audit penalty?

Facing IRS audit penalties and don't know what to do? Contact us today for professional tax help. At Brotman Law, we have a track record of successfully representing clients before the IRS and leading audit reconsideration negotiations to get penalties abated.

FAQs

What happens if the IRS audits you?

The audit timeline can vary depending on the specifics of your case. As per the Internal Revenue Manual, the timeline is 26 months after the due date of the tax return or the date it was filed, whichever is later. Check the IRS audit process timeline page for more.

Who may be affected by monetary penalties imposed by the IRS?

Individuals not in compliance with tax liabilities will incur monetary penalties. The IRS also imposes monetary penalties on tax preparers who disclose information given to them to prepare a tax return. If the offending practitioner acted on behalf of an employer, a separate penalty may be imposed on the employer.

What happens if my CPA fails to file a tax return for me?

A CPA’s failure to file a tax return is not an excuse the IRS accepts. You are still responsible for filing your tax return on time even if your tax professional forgets. You could be fined and charged interest if you file late or fail to file it at all.

What happens if you don't respond to a tax audit?

The IRS will proceed to decide the issues against you if you don't respond to a tax audit. You may be liable for additional taxes, penalties, and interest that the IRS will start the collection process on. You will also lose your appeal rights within the IRS. 

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