Founded by a former IRS Agent

Founded by a former IRS Agent

What You Need to Know About IRS Audit Penalties

May 28, 2015

What You Need to Know About IRS Audit Penalties

Few things can strike dread in your heart quite like an IRS audit. Unfortunately, if you are hit with an audit, the chances of getting through it without owing additional taxes are low, as more than 75% of people who are audited end up owing more. What you may not know, however, is you may end up owing a lot more than extra taxes: you can be hit with several tax audit penalties, depending on the type of deficiency the IRS discovers. Here’s what you need to know about potential penalties you can face.

Civil Fraud Penalty

The civil fraud penalty is one of the most common penalties and it will be equal to 75% of federal tax that is not paid and linked to fraud. Tax underpayments not related to the fraud can also be hit with an accuracy-related IRS penalty.

Accuracy-Related Penalty

The IRS can impose a penalty of 20% on your total tax understatement if your tax return is inaccurate. Some misstatements on your return can even trigger a massive 40% penalty. The following inaccuracies can lead to a penalty.

  • Understating your income by $5,000 or 10%, whichever is higher.
  • Disregarding IRS regulations, which involves taking a position on your taxes that is in violation of IRS rules.
  • Negligence or disregard of rules if you fail to make a reasonable attempt to conform to tax rules.
  • Misstating the value of property, including undervaluing depreciating property or overvaluing property that has been donated. The penalty is 20% if you under- or overvalue property by 200%, and it increases to a 40% penalty if you over- or undervalue the property by 400%.
  • Overstating pension liabilities by 200% or greater.
  • Undervaluing an estate or gift by 65% or less than market value if it causes an understated tax of $5,000 or greater.
  • Understating tax liabilities related to listed transactions.

Failure to File Penalties

If you did not file a tax return because you mistakenly believed you did not need to, you will need to pay penalties for failure to pay and failure to file after an audit. Fraudulent failure to file, however, is a civil or misdemeanor offense. In this case, you will be hit with a penalty of $25,000 for every year you did not file and you can face up to a year in jail.

Interest and Late Penalties

If you are found to owe more in taxes after an audit, you will be hit with a penalty of 0.5% for every month you do not pay. This penalty begins 21 days after the notice is issued. Even worse, audits that result in civil fraud, failure to file a tax return, or accuracy-related penalties are hit with interest of 3% a year, which is added to the penalty you owe. You have just 21 days to pay a penalty of $100,000 or less in full before interest charges are added, or only 10 days if the penalty is greater.

Audits are feared for a reason, and the penalties for making mistakes — mistakenly or not — can be severe. This is why it’s important to review your tax return carefully to ensure accuracy.

It’s time to schedule an appointment with Pogosian Nazaryan & Company.