What Happens if You Get Audited and Found Guilty?

Despite tax returns feeling like a mundane annual chore, it is important that your income tax return be accurate. The Internal Revenue Service (IRS) performs audits to ensure taxpayers pay the accurate amount of federal tax owed. If you receive an IRS tax audit notice, complying and providing the requested documentation is important. Not doing so can put you at risk of being found guilty, which can have severe consequences.

What Happens if You Fail an IRS Audit?

The majority of tax returns are resolved civilly. The IRS will make a determination, and the taxpayer can either agree or disagree with it. Once the IRS concludes its audit, it will send an IRS Audit Results Notice. It will state whether there were no changes, a tax refund owed, or additional taxes owed. No other action is required if the taxpayer agrees with the IRS determination.

If the taxpayer is owed a refund, the IRS will issue a check. Taxpayers who owe unpaid taxes can either pay their tax liabilities or appeal the determination. “What will end up happening [after the audit] is the IRS revenue agent auditor will issue an audit report. That report would either add items to income or deny expenses,” explains John Pontius, a top-rated tax attorney in Rockville, Maryland, for the firm of John S. Pontius Tax Law, PLLC.

Failing an audit likely means you have a tax bill with added penalties and interest. If you disagree, your next step should be to review the findings. You can respond to the IRS office with additional information or corrections. Then, move forward with an appeal.

Potential Consequences of Failing an IRS Audit

Once you fail an IRS audit, you can expect a variety of associated consequences. The consequences that you experience will depend on the facts of your audit and the reason for failure. The more egregious your actions are and the more you owe, the more severe the consequences will be.

1. Additional Scrutiny on Past Returns

The IRS typically chooses to audit tax returns that raise red flags with typical markers of inaccuracy. Once you fail an audit, you may be marked as someone worth looking at again. A single small mistake that the auditor can correct quickly may not mark you for future audits. However, if you have several errors, significant errors, or high-value errors, this can trigger the IRS to audit additional returns. Normally, the IRS can only go back three years to audit returns. If there is suspected fraud, the IRS can go back further. It may also take a closer look at future returns.

2. Future Loss of Credits

While many tax credits are available, not everyone will qualify for them. If the IRS determines you claimed credits you shouldn’t have, you could be banned from claiming them. This could prevent you from claiming a credit for which you are qualified in the future. The auditor could also assess a 20 percent penalty for the incorrect claim.

If you negligently claimed the Earned Income Tax Credit (EITC), you won’t be able to claim it for the next two years. If the IRS determines you committed fraud when claiming the credit, you could be banned for the next ten years. This applies to the American Opportunity Tax Credit, Child Tax Credit, EITC, or Credit for Other Dependents.

Pontius highlights the tax credit that is commonly lost by taxpayers who fail their audits. “There are certain credits, such as the Earned Income Tax Credit—which requires some due diligence on the preparation side—where, if you make them improperly, you could lose the ability to claim them in the future.”

3. Late Payment or Late Filing Penalties

This consequence is not exclusive to an audit. However, if the auditor discovers you filed or paid late during their audit, they can add these penalties to the amount of tax due.

4. Interest

Like many other types of debt, you will have to pay interest if you don’t pay on time. The auditor will also assess interest once you fail an audit and owe additional taxes. If you are assessed penalties, interest is also applied to the penalty. The interest is calculated back to the later date of the filing deadline or tax due date.

5. Fraud Penalties

The most serious potential consequences of a failed IRS audit are fraud penalties. If the auditor believes the taxpayer committed fraud, they can assess a 75 percent penalty on the unpaid tax.

How Are IRS Audit Penalties Calculated?

The tax code outlines how penalties are calculated. If you understate your income by 10 percent or $5,000 (whichever is greater), accuracy penalties are 20 percent of the understated discrepancies.

The penalty for business owners who overstate pension liability by 200 percent is 20 percent. It increases to 40 percent for overstatements of 400 percent or more. No penalty will be assessed for misstatements of less than $1,000.

For taxpayers who misstated property valuation by 150 percent or more, the penalty is 40 percent of the underreported tax.

How Do You Mitigate IRS Audit Penalties?

Sometimes, taxpayers find themselves in the impossible position of not being able to pay their tax penalties. If you cannot afford to pay your total tax debt by the due date, there are options that could mitigate your penalties. Your first option is to appeal the determination. This can be done through the Office of Appeals. You could also file in Tax Court.

Pontius discusses the possibility of mitigating your audit penalties but also acknowledges that it isn’t an easy thing to achieve. “It’s a bit of art and science, these audits. You could talk to the auditor or the manager and try to get some of the penalties either reduced or knocked down. But generally, the penalties are going to be consistent with the regulations.”

1. Mitigation for Failure to File Penalties

A taxpayer could qualify for relief from failure to file penalties if they can show they exercised ordinary care yet were still unable to file or pay their taxes on time. For example, valid arguments for relief include natural disasters, fires, or civil disturbances. You could show that outside sources have made obtaining the necessary records impossible despite your best efforts. Death or serious illness are also valid defenses.

In contrast, there are excuses that taxpayers attempt to use but are not valid. You cannot claim reliance on a tax professional or tax preparer, lack of knowledge, mistake, oversight, or lack of funding.

2. Mitigation for Information Return Penalties

In some cases, you may be able to request IRS relief if you can show that you acted reasonably before and after the failure. To do this, you must show that you requested extensions, tried to prevent foreseeable failure, fixed issues causing failure, and corrected any failures that you were aware of as quickly as possible.

In addition to acting reasonably, you must also show that there were significant mitigating factors. That the failure happened because of events beyond your control. Qualifying actions for this would include actions by the IRS, an agent, or another person. 

3. Mitigation for Reasonable Cause

The IRS considers mitigation for reasonable cause on a case-by-case basis. Qualifying will depend on the facts of the case and the type of penalty you owe. This relief isn’t available for some penalties, such as the estimated tax penalty. If you want to seek penalty relief under this claim, it is best to speak with a lawyer. They can explain the Tax Code and the specifics the IRS will consider. An attorney will help you determine if you qualify and gather the necessary documentation for a compelling request for relief.

4. Mitigation for Accuracy-Related Penalties

If your tax audit penalties are accuracy-related, you may qualify for relief if you can show you acted in good faith or with reasonable cause. To mitigate this penalty, you must show the IRS that you made efforts to report or correct the error. The IRS will also consider the tax problem’s complexity, your experience, your knowledge of tax law, and your efforts to understand your tax obligation from a tax professional.

5. Applying for a Payment Plan

If you can’t afford to pay the total amount of penalties, you can apply for a payment plan. There are short and long-term payment plans available, depending on how much you owe. You will make monthly installment payments until the debt is paid off. This approach stops interest accrual, late penalties, and IRS collections efforts.

Another option is an Offer in Compromise (OIC). The taxpayer will make an offer to the IRS to pay less than the amount of tax owed. The IRS will accept the offer based on the amount offered and the taxpayer’s financial situation.

6. Interest Relief

The IRS will typically not remove interest on its own. However, if the IRS removes penalties, the associated interest is also removed.

Can You Go to Jail for an IRS Audit?

You do not go to jail or prison directly from an IRS audit. This is a civil investigation that looks into tax issues. However, an IRS audit can lead to a criminal investigation. Once the IRS conducts an audit, if the IRS agent believes or suspects that the taxpayer committed tax evasion, tax fraud, or another crime, they will forward their findings to the appropriate agency. This investigating agency could determine that criminal charges are appropriate. Not all instances of underpayment or underreporting are automatically treated as a potential criminal case. The taxpayer’s tax avoidance actions must go further to indicate criminal activity.

If you face criminal charges, you could face jail time if found guilty. Tax fraud comes with a penalty of up to three years in jail. Tax evasion comes with a potential penalty of up to five years in jail. The amount of time a taxpayer gets is determined by the facts of the case, the taxpayer’s criminal history, and the amount of tax owed.

There are also several other crimes that the taxpayer could face in the course of a criminal investigation:

• Aiding and abetting
• Making false statements
• Making false, fictitious, or fraudulent claims
• Making fraudulent documents
• Fictitious obligations
• Failing to supply information
• Attempting to interfere with the administration of Internal Revenue laws
• Participating in a conspiracy to defraud the United States
• Identity theft

When to Get a Tax Attorney Involved

While you have the right to represent yourself in tax matters with the IRS, you also have the right to work with a representative. You can hire a tax attorney, certified public accountant (CPA), or enrolled agent. These tax professionals know the tax code, making them capable of helping taxpayers advocate for their rights.

Speaking with a tax attorney before the audit process begins can help reduce the risk of receiving unfavorable audit results. If you do receive a negative determination, a lawyer can help you pursue mitigation of the penalties. If your IRS audit leads to a criminal investigation, you may need a tax attorney who focuses their practice on the criminal aspect of the tax code. Having a legal defense during a criminal trial is essential for helping you form a legally effective defense.

Find Experienced Legal Help

Speaking to a lawyer sooner rather than later can help you better protect yourself. Failing an IRS audit will likely mean owing more taxes, interest, and penalties. This can make hiring an attorney well worth the cost. Their knowledge of the tax laws aids in working with the IRS before, during, and after the audit. Their representation can assist with filing an appeal to have the possibility of mitigating or avoiding penalties.

Visit the Super Lawyers directory to begin your search for an experienced tax attorney. For more information, read our guides on tax law.