What Are the Types of Penalties That I Could Face in the Audit?

So the penalty structure in an audit is really rangy and it can range anywhere from a five percent penalty all the way up to a seventy five percent penalty depending 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 more in tax. Generally speaking with most of our clients, although we try and get them out with flying colors, there's usually some reason that the IRS has audited another return. So a $5,000 adjustment is usually not out of the ordinary; however, we'll do everything that we can during the course of the audit to mitigate any penalties. For more serious cases, the goal in the audit is to mitigate the civil fraud penalty which is a 75% penalty. In addition to the 75% penalty on top of the tax that you owe, civil fraud prevents certain resolutions within IRS collections. That's why it's 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 but as you've seen here the penalties can really range in value and so one of the important things to think about when you're hiring a representative, when you're making the decision on who to represent you in the audit, is how you're going to deal with the issue of penalties and mitigate them as much as possible.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law