Summary

1. Failing an IRS audit means you cannot provide enough documentation to support the claims on your tax return.

2. There are three potential outcomes of an audit: no change, you agree with the IRS’s proposed changes, or you disagree with the changes.

3. Penalties related to failed audits include accuracy-related penalties, failure to file or pay penalties, erroneous claim for refund or credit penalties, and civil fraud penalties.

4. Other implications of a failed tax audit include a higher tax assessment, bans from claiming future credits, and criminal charges.

5. If you owe money and can’t pay, you have options like a payment plan, an offer in compromise, penalty abatement, or filing an appeal.

6. The Timothy S. Hart Law Group can help you manage tax audits, negotiate with the IRS, apply for an installment agreement, request an offer in compromise, manage the appeals process, and much more.

 

What Happens If You Fail a Tax Audit?

One potential outcome of an audit is failure — which really just means you don’t have the proof to support what you included on your tax return, and you may owe money to the IRS and even penalties on top of your balance.

This situation can feel overwhelming, but there are always ways to get through it. This guide covers what happens if you fail an audit and your options for resolution when you can’t afford your new tax bill.

Don’t hesitate to reach out to the team at the Timothy S. Hart Law Group when you have questions about the audit process or the results.

What Does It Mean to Fail an IRS Audit?

If you’re audited and you can’t provide enough documentation to support the claims on your tax return, you could fail the audit. This really just means that the IRS found your tax return to be incorrect and that you cannot prove the numbers you provided.

During the audit, the IRS reviews records like accounts and financial statements to ensure what was reported on the tax return is correct. Audits can be conducted through the mail or in person.

The IRS audits tax returns for a variety of reasons. Some are random selections, and others are triggered because information submitted by the taxpayer doesn’t align with information submitted by their employer or financial institution.

What Happens If You Are Audited and Found Guilty

The IRS may audit your tax return if they suspect that you didn’t report all of your income or made some other mistake. In some cases, the result of an audit is confirmation of those suspicions, meaning you didn’t substantiate your claims on your tax return with documentation and evidence.

So, what happens next? There are three potential outcomes of an audit:

• No changes are required: If you provide sufficient evidence of your claims, the IRS may agree that everything is in order and you don’t have to change anything on your return. This is the most favorable outcome for taxpayers.
• You agree with the IRS’s proposed changes: If the IRS does discover a discrepancy, the auditing agent will propose changes, such as altering your reported income and a higher tax assessment amount. To move forward, you would need to agree with those changes.
• You don’t agree with the changes: This could happen if the IRS proposes changes to your return and you don’t agree with those changes. The next steps may be filing an appeal or meeting with an IRS officer to resolve the issue.

Speak to a tax professional when you’re not sure what these outcomes mean for your taxes and your finances.

Tax Audit Penalties

A range of penalties may apply, depending on the type of error you made and other details about your tax return. Here are common IRS audit penalties:

Accuracy-Related Penalty

An audit could uncover that you made a mistake when reporting your income or claiming tax credits or deductions you don’t actually qualify for. The mistake led to an understatement of the taxes you owe. There are two types of accuracy-related penalties:

• Negligence/disregard of tax law: If you neglect or disregard tax laws when filing your tax return, it could lead to excluding income or failing to ensure you actually qualify for the tax breaks you’re claiming.
• During the audit, the IRS reviews records like accounts and financial statements to ensure what was reported on the tax return is correct. Audits can be conducted through the mail or in person. This applies if you understate the taxes you owe by 10% of the required taxes, or $5,000, whichever is more.

This penalty is nothing to shrug off. It’s equal to 20% of the amount of your underpaid tax that’s related to negligence/disregard or the amount of tax underpayment. The IRS also charges interest on this penalty, so your balance will continue to grow until you pay it off.

Failure to File or Pay Penalties

An audit could uncover that you didn’t file or pay your taxes on time. This means you may have to pay the failure to file penalty, which is 5% of what you owe per month, or the failure to pay penalty, which is 0.5% of what you owe per month. Both penalties won’t exceed 25%. If you get hit with both at once, the failure to file penalty is lowered by 0.5% each month.

Erroneous Claim for Refund or Credit

Another potential penalty after an audit is the erroneous claim for refund or credit. This will apply if you claimed a tax break you don’t actually qualify for or you claimed an excessive amount. This penalty is 20% of the excessive amount you tried to claim on your tax return, but it may not apply if you had reasonable cause for the error.

Civil Fraud Penalty

In some cases, a civil fraud penalty may apply to your case. The IRS only charges this penalty if they find you committed fraud in an audit. This penalty is 75% of taxes you didn’t pay because of fraudulent actions. Note that civil fraud charges are not the same as criminal fraud charges.

Trust Fund Recovery Penalty (TFRP)

This penalty applies when there were mistakes made on an employer tax return. If the audit uncovers that you didn’t send taxes to the IRS that you withheld from your employees’ wages, you may get hit with the TFRP. The penalty is equal to the amount you withheld and didn’t pay — so that means you have to pay double what you owe with the addition of this penalty.

Other Implications of a Failed Tax Audit

Aside from penalties, you may be impacted in other ways when you fail an audit. Let’s look at those potential consequences:

A Higher Tax Assessment

The IRS may find that you underreported your income and understated the taxes you owe, so you’ll be liable for an additional amount. You have options if you can’t afford to pay or you don’t agree with this new assessment, so talk to a tax expert when you’re not sure.

Bans from Claiming Future Credits

If you try to claim a tax credit you don’t qualify for, the IRS may not let you claim that credit over the next couple of tax years. If fraud was uncovered in your audit, you may have to wait 10 years to claim that credit again.

Criminal Charges

Tax fraud and tax evasion charges could be potential outcomes of an audit. The potential consequences of these crimes can be significant, with the maximum penalty for individuals at $100,000 and up to five years of jail time.

What to Do If You Owe Money and Can’t Pay

A potential outcome of a tax audit is a higher tax bill. What happens if you get audited and owe money? What if you’re unable to pay the higher amount? Here are your options to work to get the matter resolved:

File an Appeal

If you don’t agree with the IRS’s findings from the audit, including an increased tax assessment, you can file an appeal to ask the IRS to reconsider. Act quickly to avoid missing your chance, and follow the instructions on your audit notice.

Apply for an Installment Agreement

When you can’t afford your new tax bill, consider applying for a payment plan. This way, you can pay off your balance over time instead of in one lump sum. Just be sure you pay the full amount on time each month to avoid default. In most cases, you can apply for an installment agreement online.

Explore Tax Relief Options

The IRS may agree to settle your debt for less through an offer in compromise if you can prove that you can only afford to pay part of your tax bill. Another option is requesting currently not collectible (CNC) status, which puts a hold on your account, and the IRS won’t try to collect while you have that status.

Pay Attention to the Statute of Limitations

There are a few statutes of limitations related to taxes that could impact your case. First, the statute of limitations for IRS audits is usually three years — so they only have three years from when you filed to audit your tax return. If the audit uncovers fraud, however, they could go back six years.

Another statute of limitations is the collection statute expiration date (CSED), which is the period the IRS has to try to collect from you. This period is 10 years, so if it passes, they can no longer try to get you to pay.

Request Penalty Abatement

You may be able to get your tax penalties waived or reduced if you qualify for abatement. First-time penalty abatement applies to taxpayers who have otherwise good tax compliance in the last few years. Reasonable cause abatement could be an option if something outside of your control, such as a natural disaster, led to your mistake that triggered the penalty.

Talk to a Tax Attorney

When you’re hit with additional taxes after an audit and you can’t pay, talk to a tax expert, like a CPA or attorney, about your situation. You may not be fully aware of the tax laws and relief programs that apply to you. A tax professional will review your case and the audit findings, and then help you come up with a plan to move forward.

Why Trust the Team at Timothy S. Hart Law Group?

Tax audits can be stressful and time-consuming, especially when you don’t get your desired outcome. If you’ve failed a tax audit and are facing penalties or additional taxes, you don’t have to deal with it on your own.

Turn to Timothy S. Hart Law Group to talk to a tax professional about your case. We help you manage tax audits, negotiate with the IRS, apply for an installment agreement, request an offer in compromise, manage the appeals process, and much more.

Contact our law office in New York City or Albany, NY, to set up a tax attorney consultation.