It’s every taxpayer’s worst nightmare: you open your mail to discover you’ve received an audit notice from the IRS.
Cue the panic, right?
The good news is, there’s a limit to how bad an audit can get. Sure, it’s rough to fail an IRS audit. And paying the bill they’ll probably stick you with is going to hurt. But unless you’re refusing to pay taxes or purposefully trying to defraud the government, you won’t be facing jail time.
Let’s take a look at what happens for the typical taxpayer who ends up on the wrong side of the IRS.
What does an IRS audit mean for you?
The US has a tax reporting requirement — what we generally refer to as “filing your taxes.” Once a year, you assess your income, report it to the IRS on the appropriate forms, calculate your taxes, and either pay up or request a refund. The IRS computers review your submission, and for most of us, that’s the end of it.
So, in that sense, every tax return is audited at least once by a computer.
Occasionally, the computer finds discrepancies between what you reported and what the IRS expected you to report. When this happens, it sends a letter that says, in effect: “Hey, you made a mistake in this part of your tax forms. Please send the corrected amount of money to us.”
Or even, if you’re lucky: “Are you sure you didn’t want to claim this tax credit? You may be eligible for a refund if you do. Please return this form to get started.”
But sometimes, your tax return requires something a little more complicated than a simple correction. So cue the audit. (Or it could be random selection. The IRS doesn’t openly say what triggers an audit. It’s a myth, though, that home office deductions will automatically get you audited.)
In this case, you may get an audit notice in the mail. Remember: You’ll never receive a real audit notice as a phone call, email, or other electronic communication.
The types of IRS audits
An IRS audit typically falls into three types:
- A correspondence audit (done through the mail)
- An office audit (where the taxpayer goes to an IRS office)
- A field audit (where the IRS agent comes to you)
Most audits end with adjustments to reported income. That generally means you’ll owe more tax, but occasionally you’ll even get a refund.
What happens if you get audited and owe money?
For most people who fail an audit, the result is a bigger tax bill. Not only will you owe more taxes than you thought — you’ll also owe interest on those taxes.
This can make the bill quite high, but remember: You definitely won’t get sent to prison for being unable to pay your additional taxes. If you can’t afford to pay it all, work out a payment plan with the IRS, or even try to get an Offer In Compromise.
Can you go to jail for an IRS audit?
The short answer is no, you won’t go to jail. The slightly longer answer is still no. The longest answer is, it could set up a chain of events that lands you in jail, but that’s very rare.
To go to jail, you must be convicted of fraud or tax evasion, and the proof must be beyond a reasonable doubt.
First, the IRS has to present your situation to the Justice Department. Based on the facts of your situation, the Justice Department must decide that it’s worth pursuing.
The Justice Department will only chase your case if there’s clear evidence that you violated the tax code or some other law.
Finally, there needs to be a trial. The court needs to agree that you broke the law, and then decide you should be punished with jail time instead of other criminal penalties, like probation or fines.
That’s quite a few linked scenarios that all need to play out in a particular way. That’s why these cases don’t happen very often.
What’s much more common is having to pay a number of extra fees.
Other fees and penalties for failing an audit
Sometimes, an audit reveals something more than an honest mistake on your taxes. Sometimes, people take “creative liberties” on a return. Jail time is rare, but when that happens, the IRS may file charges against you. These are civil penalties, not criminal charges.
Note that any of the items listed below can be grounds for criminal charges if the judicial system determines there was criminal intent behind them.
There are three main civil penalties you might face if you fail an IRS audit. In these cases, you can expect a minimum penalty of 20% of the unpaid tax, and in some cases as much as 75%.
This penalty applies if you intentionally disregard IRS rules and regulations when filing your taxes. That might mean not keeping proper records to back up your deductions, or not reporting income on your Schedule C when it’s clearly shown on your 1099
Understatement of income tax
This happens when you misrepresent your tax liability by at least 10% (or $5,000, whichever is greater).
This also includes misrepresenting the value of your assets, either by under or overstating their worth. Some people falsify their assets so they can claim higher depreciation deductions or minimize their capital gains taxes. (This is one of the many tax evasion schemes Donald Trump landed in hot water for.)
Failure to pay
After the audit, the IRS will send you a tax bill. This penalty kicks in if you refuse to pay it.
You can dispute the results of an audit. (More on that process later!) But refusing to pay a tax bill without disputing it can result in further charges, of up to 25% of the amount owed.
Each of these penalties adds another fee to your tax bill. These civil penalties are the main tool the IRS uses to enforce compliance.
Seizure of assets
If, after all this, you still don’t pay your taxes and penalties, the IRS has the right to seize your assets.
This will only happen after your tax bill has gone through the collections process. The agency isn’t just going to walk in and start taking things without plenty of notice.
After repeated written notifications (and a 30-day period in which you can request a hearing), the IRS has the right to seize your assets to cover the amount you owe.
These seizures can include:
- Withholding your paycheck
- Taking assets from your bank accounts
- Seizing and selling off property
For the most part, seizure of assets only happens in extreme situations. And there are limits on what sort of property (and what types of income) the IRS can take from you.
Still, there’s a reason we say the only things that are certain are death and taxes — eventually, the IRS will collect on what it's owed.
How to dispute an audit
For most people, once the IRS decides the outcome of an audit, that’s that. You can’t dispute the results of an audit just because you don’t like the bill they’ve stuck you with. The IRS also won’t consider appeals based on moral or religious objections, so don’t convert just yet.
But if you feel the IRS has truly made a mistake — either in their understanding of the law, or about the facts of your case — you have the right to appeal their decision. Here are three ways to do it.
Appealing with a formal written protest
Once you receive the IRS’s written report on the results of your audit, you have 30 days to file an appeal.
To start, don’t sign your audit report. Signing the report means you agree with its findings.
Instead, send the IRS a written letter of protest within 30 days of getting your report. (It’ll come with a letter explaining your appeal rights, and the address you should send your protest to.)
Making a small case request
If the total amount you owe (including interest and fees) is less than $25,000 for the tax period stated on your notice, you can submit a small case request instead. This is, essentially, a more informal way to get your appeal through.
Simply fill out Form 12203 within 30 days of getting your audit report, and send it to the IRS for review.
Getting innocent spouse relief
In addition, for certain situations there’s innocent spouse relief.
Married couples filing jointly bear equal weight for the accuracy of their tax returns. However, the IRS recognizes that there are times where one spouse may not be aware of incorrect taxes. In cases like this, consider applying for innocent spouse relief.
Innocent spouse relief won’t protect any joint income. But if it’s approved, your individual income and self-employment taxes are saved. We can’t necessarily say the same about your marriage, though.
How to pass an IRS audit
In the end, the only way to pass an IRS audit is to pay your taxes in full, on time, and keep records of all your claims.
Everyone wants to save money on their taxes, but fudging the numbers isn’t the way to go about it. That’s why we created Keeper — to help independent contractors and small business owners like you find all the deductions you’re legally entitled to, so you can lower your tax bill the right way.
If you file with Keeper, we’ll make sure everything looks right. On the off-chance you get an audit notice, a tax professional will work with you on-on-one to get it resolved.
Remember, tax audits can be random. Keeping track of your finances may not prevent you from getting that notice in the mail. But it does ensure you can back up all your claims in case the IRS wants to take a closer look at your returns. And that should be enough to give you some peace of mind.
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