If you are selected for an audit, whether randomly or intentionally, the IRS will examine your tax return for discrepancies. Should they find any errors, your return may be subject to additional taxes, interest, and/or tax audit penalties. Statistically, more than 80% of audits will result in an adjustment, and many will include accuracy-related penalties. If the error was unintentional, you’ll normally have to pay 20% of the total amount understated as part of the penalty fee. In instances where the error is grossly inaccurate, the penalty may increase to 40 percent. Accuracy-related tax audit penalties include:
Negligence or disregard of rules/regulations Imposed if your negligence or disregard of the rules or regulations caused the underpayment.
Understatement of income tax Imposed if you understated your income by $5,000 or 10%, whichever is greater.
Misstatement of the value of property Imposed if you either overvalued donated property or undervalued depreciating property. If you overvalued or undervalued by 200%, you’ll receive a 20% penalty. If you overvalued or undervalued by 400%, you’ll receive a 40% penalty. If the overstatement is $1,000 or less, you will not receive a penalty.
Overstatement of pension liability Imposed if you made an overstatement of your pension liabilities over $1,000. If you overstated by 200%, you’ll receive a 20% penalty. If you overstated by 400%, you’ll receive a 40% penalty.
Estate or gift tax valuation understatement Imposed if you understate the value of any property claimed on a gift or estate tax return. You will not receive a penalty if the understatement causes a tax underpayment of $5,000 or less.
Understatement related to reportable transaction Imposed if you understate tax liabilities because of a tax shelter or tax avoidance transaction that is disclosed. Understatements result in a 20% penalty, while inadequate disclosures result in a 30% penalty.
During the tax audit, the IRS may also impose harsher penalties (up to 75%) on taxpayers who knowingly engage in fraudulent activity. They cannot, however, stack accuracy-related penalties on top of fraud penalties. For accuracy-related penalties, you’ll also be responsible for interest that accrues from the date the return was due (including extensions) until the penalty is paid in full.
How to Fight Tax Audit Penalties
During the audit, you may be able to avoid penalties related to the underpayment of tax if you can show reasonable cause as to why you understated the amount or can provide support for your treatment of the item(s) in question. After the IRS has completed its audit, however, you will have two options: accept the finding and pay what is due or request reconsideration. Do not pay any of the taxes, penalties, or interest if you plan to dispute the findings. If you’ve already paid, you’ll need to request a refund. Reconsideration is not guaranteed, but the IRS may consider taking another look at its findings if any of the following is true:
You did not appear for the audit
You did not receive the audit notice due to change of address
The IRS refused to consider documentation you provided which could have reduced or eliminated the taxes, penalties and/or interest you owe
There is new evidence to support your case
You submitted a previously unfiled tax return (with the correct tax) to replace one created by the IRS
The IRS made errors (mathematical or processing) determining the tax you owe
Keep in mind that the penalties and interest will continue to accrue while you are waiting for the IRS to respond. If they deny your request for reconsideration, you may still have other options for reducing or eliminating your tax debt. At Tax Defense Network, we’ll help you find the best solution for your tax problems. Contact us today for a free consultation.
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Tax Audit Penalties FAQs
Q:What is the IRS civil fraud penalty?
The IRS civil fraud penalty is a common tax audit penalty that is defined in IRC Section 6663. The IRS applies a civil fraud penalty if they can prove with clear and convincing evidence that any part of an underpayment of tax owed is due to fraud. If it can be applied, this penalty adds 75 percent of your tax liability to your overall balance due. There is no statute of limitations on the assessment of additional tax in cases where a portion of the underpayment is due to fraud.
Q:Can you go to jail for not paying your taxes?
You can’t technically go to jail for unpaid taxes. There are a few things a tax audit can uncover, however, that are considered criminal offenses. These include filing a fraudulent tax return, evading taxes, intentionally failing to file a tax return, or intentionally failing to pay estimated taxes. Committing a criminal offense can lead to jail time.
Q:What happens if you fail an IRS tax audit?
If the IRS finds issues during the audit process, they will propose changes to your tax return. These changes may include any tax audit penalties that apply. If you accept them, you’ll have to pay any charges required, including any penalties and interest. Failing an IRS audit isn’t the end of the world though. If you disagree with the findings of an IRS audit, you can always consult a tax expert to determine if an IRS appeal is the best next step.
Q:What happens if I can’t pay my tax audit penalties?
If you are unable to pay your taxes, penalties and/or interest in full, you may be able to request first-time penalty abatement. If approved, the IRS may waive some of all of the penalties assessed. Other options include payment plans or requesting an Offer in Compromise. Contact Tax Defense Network for a free consultation to see which option is best for you.
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