Whether you own a large or small business or are an individual taxpayer, no one is immune from receiving an audit notice from the IRS. In fiscal year 2019, the IRS audited 771,095 tax returns, which resulted in almost $17.3 billion dollars in additional taxes.
Although many people believe that affluent individuals are more likely to be audited, that is not always true. In fact, 256,708 of audits in 2019 were conducted on individual tax returns where the Earned Income Tax Credit – a benefit for lower income individuals – was claimed.
If your tax return is being audited by the IRS, there is a greater likelihood that the IRS finds errors in your return, which can result in hefty IRS audit penalties and interest. In more extreme cases, the penalties can cost you tens of thousands of dollars – or even result in jail time.
IRS audit penalties are fees or criminal repercussions imposed on taxpayers who have made mistakes on their tax return, or who have unpaid taxes because they didn’t file their taxes.
An audit can be prompted for a number of reasons, such as:
- Filing your tax return late
- Not paying your taxes by the due date
- Failing to file your return
- Negligence – ignoring federal rules and regulations.
You may face different IRS penalties, depending on the nature of your filing error.
Reasons For Tax Penalties
The majority of IRS audit penalties relate to errors on tax returns. Keep in mind that the IRS can levy more than 150 different penalties. As a result, when the IRS does conduct an audit on your tax return, it is likely that you will end up with a larger tax bill.
The most common reasons why you may receive a penalty after an IRS audit, include:
- Dismissing Regulations or Negligence
Ignoring or failing to make a proper attempt to follow IRS rules and regulations. This includes failing to file your tax return.
- Significantly Underreporting Your Taxes
You could face an IRS audit penalty if you understate your income by 10% of your actual income or by $5,000. The penalty will be based on the larger of the two amounts.
- Significantly Misstating the Value of Your Property
IRS penalties can be applied whether you overvalue a donated property or undervalue a depreciating property. If you overvalue or undervalue a property by 200%, a 20% penalty will be applied by the IRS. If you overvalue or undervalue a property by 400%, a 40% penalty will be applied.
- Significantly Overstating Pension Liabilities
Overstating your pension liabilities by a minimum of 200% can result in a 20% penalty. In the event that the overstatement is $1,000 or less, no penalty will be applied.
- Significantly Understating a Gift or Estate
In the event that you understate the value of a gift or property by $5,000 or more, you may be required to pay civil fraud penalties.
- Failing To Pay Your Taxes By The Due Date
If you don’t pay your taxes by the deadline, the IRS will charge a failure to pay penalty – which is typically 0.005% of your unpaid taxes – and will be applied monthly until your debt is paid in full.
- Underreporting Additional Reportable Transactions
You may receive hefty penalties for understating additional tax liabilities, which can include insufficiently reporting tax shelters or tax avoidance shelters.
Types of Tax Penalties
When the IRS audits your tax return, they will determine if your flawed return is subject to:
- Additional interest
- Additional penalties – including civil penalties, civil fraud penalties or criminal penalties
The additional interest and penalties can be defined as follows:
Applies if you file your tax return late or fail to pay taxes owed on time. The interest depends on how much you owe in unpaid taxes and the precise timing of the underpayment.
Moreover, the IRS can charge you minimum late filing fees when you file your return 60 days or more after your tax return due date, which includes the extended tax return due date.
This would either be $435 for tax returns filed in 2020 or paying the tax in full, depending on which amount is less. If you file late when the IRS owes you a tax refund, you won’t be charged late filing fees. However, you must file your taxes to get your refund.
Errors made in your tax return. In the event that there is a significant discrepancy in your return between what you listed and the amount that you in fact owe, you may have to pay a civil penalty of 20% of the amount that you underpaid.
Civil Fraud Penalty
Pertains to a penalty for underpaying your taxes as a result of fraud.
Whether you underpay the taxes you owe or fail to pay the taxes altogether, you will be required to pay a penalty of between 5-25% each month on the unpaid tax.
In the event of civil fraud, you can be charged a penalty of up to 75% of the amount that you underpaid, which will then be added to your overdue tax bill.
You must pay overdue taxes after 21 days of an audit. If you fail to do so, you will be charged an additional penalty of 0.5% per month for each month you are late.
The most serious penalty that a taxpayer can receive. Fraud and tax evasion fall into this category.
The following may apply if you are charged with a criminal penalty:
- If you deliberately fail to file a tax return, pay your taxes or keep proper tax records – and have criminal charges filed against you – you can receive up to one year of jail time. Additionally, you can receive $25,000 in IRS audit fines annually for every year that you don’t file.
- If you are found to have filed a fraudulent return – which is a felony – you could potentially go to jail for up to three years, plus pay fines of up to $100,000.
- If you are charged with tax evasion, which is willfully concealing or misrepresenting your assets or finances, so you don’t have to pay taxes. If you are convicted of tax evasion, you could spend up to five years in jail, and be fined up to $250,000. Tax evasion is the most serious tax offense of all.
For fraud, tax evasion and other criminal charges, the Statute of Limitations is six years. The Statute of Limitations, however, does not apply to any civil charges.
If you’re facing penalties that are a result of an audit – and would like to challenge the outcome – an audit reconsideration request would need to be submitted. However, this is best done alongside a tax professional.
The IRS will only reconsider your audit under limited circumstances. Penalties and interest continue accumulating while the IRS reconsiders your audit.
What Happens If Your Audit Reconsideration is Rejected?
In the event that your audit reconsideration is rejected by the IRS, it may be possible to arrange an alternative settlement, such as an Offer in Compromise or a Penalty Abatement.
An Offer in Compromise will allow you to settle your debt for only a small portion of the amount you owe. However, the IRS only accepts a fraction of the Offers in Compromise that are submitted to them.
You can also request a Penalty Abatement, where the IRS can waive your tax penalties partially or in full. In order for the IRS to grant you a Penalty Abatement, there needs to be reasonable cause or a number of other qualifying criteria must be met.
Receive The Professional Legal Tax Help You Need
Dealing with IRS tax audits can be terrifying, and it can be even scarier when you are facing the IRS alone. If the IRS has issued penalties on your return after a tax audit, call a tax professional.
A tax attorney is experienced in dealing with complex tax matters, and has the skills and knowledge to negotiate with the IRS on your behalf. They can help improve your chances of receiving an Offer in Compromise settlement, get Penalty Abatement Relief or set up an Installment Agreement with the IRS.
If you feel you were treated unfairly in an audit or an error was made on the part of the IRS, a tax lawyer will investigate your situation in-depth, as well as guide you through the entire process so that you are able to provide the IRS with the appropriate documents and avoid making damaging errors.
With over 100 tax professionals on staff from all areas of the tax industry, Polston Tax can find you the comprehensive tax help that you need. Have peace of mind knowing that our team is fully equipped to protect you and your assets, and achieve a resolution in your favor.
Suffering under tax debt should never be an option. You deserve to live debt free.
Contact Polston Tax for a free consultation today!