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 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 will find 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:
You may face different IRS penalties depending on the nature of your filing error.
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:
In some cases, the IRS will randomly select taxpayers to audit based on a statistical formula to verify inventory and financial data. With a random audit, the IRS will compare your tax return against previous years to determine any errors present before issuing an audit.
The IRS will notify you if your business qualifies for any audit by mail or an in-person interview. All initial contact will take place in the mail, and the letter you receive will include all necessary details, like contact information and filing instructions.
If the audit occurs through an in-person interview, it can be at an IRS office, your business, or your accountant’s office. For audits that take place over mail, the letter will request that you provide additional information about specific items on your tax return. If your records are too large to
mail, your business can use the instructions and contact information in the letter to request an in-person audit.
There is no specific timeline for the audit process, and your audit begins as soon as your business receives the first notice through the mail.
The timeline largely depends on how organized your records are, their accuracy, the type of audit performed, you and the auditor’s availability and how you respond to the audit.
For example, just because you disagree with the results of your audit does not mean your audit is over. Once you complete your audit, you will remain in contact with your auditor as you may file an appeal which can extend the process.
One of the easiest ways to prevent your company’s audit from taking an extended amount of time is by ensuring you keep your business records and financial statements organized. By keeping your documents organized, you can avoid the risk of an audit in the first place.
A statute of limitations for IRS audits regulates how far back into previous tax returns the IRS can go to perform an audit. The length of the audit varies based on the complexity of your specific audit and how many errors are present.
In most cases, the IRS audits small business tax returns within the last three years. However, if significant errors exist, the IRS can audit returns from over six years ago. Most audits, however, are for returns from within the last two years.
Legally, you must keep all tax return records for at least three years after filing. Keeping these records longer is a good idea as well so you are better prepared if an auditor needs tax returns from an earlier period.
The IRS will provide a written request for the specific documents needed in the letter you receive. Some documents the IRS may request are:
When the IRS audits your tax return, they will determine if your flawed return is subject to:
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.
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 ofbetween 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:
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.
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 liability 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.
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 liability should never be an option. You deserve to live with peace of mind knowing that your taxes are being taken care of.
Contact Polston Tax for a free consultation today!