There’s always the risk of an audit, and if you’re discovered to have lied about your income, tax audit penalties can be severe. The penalties vary from severe fines to criminal charges, and you may be buried behind a pile of paperwork.
Find out what happens if you are audited and can’t prove you filed your taxes correctly.
What exactly is an audit?
An IRS audit is a thorough examination of your tax returns and financial records to confirm that you reported everything correctly. These records may include W-2 and 1099 forms, as well as any money earned from side employment. Even though most people have a less than 1% probability of getting audited, it’s not worth the risk to falsify your figures or fail to double-check your work.
If you are selected for an IRS tax audit, it does not necessarily indicate that you have a problem. You might be chosen for an audit because…
- You were chosen at random using a computer program that matches your tax returns to comparable returns based on IRS statistics.
- An individual or firm with whom you have financial ties is also being audited
- Investors or business partners may be included.
If you are audited by the IRS and are concerned about what they may uncover, you may (and probably should) engage a professional to defend you and your interests.
What are types of tax audit penalties?
Now that you understand what happens if you are audited and fail, let’s look at the potential tax audit penalties.
Penalty for Misconduct
If the IRS finds errors in your tax returns after reviewing them, you might face a variety of tax audit penalties in civil court.
Negligence: If the IRS determines that you have “recklessly or willfully” ignored federal revenue requirements, it may punish you for negligence. If you can show that your actions were reasonable based on the knowledge you had and that you “acted in good faith,” you can avoid incurring a negligence penalty.
If you deceive the IRS and underpay your taxes, you may be punished 75% of what you should have paid in addition to the taxes you would owe. If the IRS believes you committed fraud, they may involve the IRS Criminal Investigation Division and pursue you criminally. The IRS does not consider carelessness or ignorance of tax law to be fraud.
Penalty for frivolous tax returns: When you fail to submit all of the information required to establish what your appropriate tax return or payment should be, you are said to have filed a frivolous tax return. The information you supplied on your tax returns is mostly incorrect.
If the IRS discovers that you submitted a frivolous tax return, you might face a $5,000 penalty. If you filed your taxes jointly with your spouse, you might be penalized $5,000 each.
Criminal Charges: You might face criminal charges in addition to possibly paying hundreds of dollars in IRS fines, fees, and interest.
Tax evasion is a criminal punishable by up to five years in jail. Failure to declare foreign bank and financial accounts may result in a jail sentence of up to ten years.
Criminal investigations and charges begin when an IRS auditor discovers suspected fraud while auditing your returns. Every year, roughly 3,000 people are convicted of tax fraud in court, demonstrating how seriously the IRS takes lying on your taxes.
Other ramifications
Not declaring all of your income might also have substantial consequences when it comes to making large expenditures, such as purchasing a home or a car. If you under-report your income, it may cause problems when you attempt to purchase a property or apply for a personal loan. You might not obtain it if it appears that you can’t afford to pay it back, so lying on your taxes could affect you in that regard.
Mortgage providers and banks will require copies of your tax returns to verify your overall income while reviewing your application. If you misled about your income to reduce your tax burden, your whole income will not be shown on the return. That implies you might be refused for the financing you require, jeopardizing your financial future.
Reconsideration of Audit
If you are facing fines as a consequence of an audit and want to appeal the results, you must submit an audit reconsideration request. However, this is best done in collaboration with a tax specialist.
The IRS will only revisit your audit if certain conditions are met. While the IRS reconsiders your audit, penalties and interest continue to accrue.
What Happens If Your Audit Reconsideration Request Is Turned Down?
If the IRS rejects your audit reconsideration request, you may be able to negotiate an alternative settlement, such as an Offer in Compromise or a Penalty Abatement.
An Offer in Compromise allows you to settle your responsibility for a fraction of what you owe. However, the IRS only accepts a small percentage of the Offers in Compromise filed to them.
You can also request a Penalty Abatement, in which the IRS will partially or completely forgive your tax fines. There must be fair cause or a number of other qualifying requirements satisfied for the IRS to give you a Penalty Abatement.
Get help:
Dealing with IRS tax audits may be stressful, and it’s harder when you’re alone with the IRS. Call a tax expert if the IRS has assessed penalties on your return as a result of a tax audit.
A tax attorney is knowledgeable and skilled in dealing with complex tax issues, and he or she can negotiate with the IRS on your behalf. They can assist you secure an Offer in Compromise settlement, Penalty Abatement Relief, or set up an Installment Agreement with the IRS.
We can find you the comprehensive tax help that you need with the professional and experienced staff. Have peace of mind knowing that our team is fully equipped to protect you and your assets and achieve a resolution in your favor.
If you believe you were treated unfairly during an audit or that the IRS made an error, a tax lawyer will thoroughly evaluate your circumstances and help you through the process.